How to Calculate If Refinancing Will Save You Money
A step-by-step guide to calculating your monthly savings, refinancing costs, and break-even point before deciding whether to refinance your mortgage.
Gather Your Current Loan Details
Before you can evaluate a refinance, you need three numbers from your current mortgage. First, your remaining loan balance — the amount you still owe today. You can find this on your most recent mortgage statement or by logging into your lender's online portal.
Second, your current interest rate. This is on your original loan documents, but confirm it on your statement in case you have already refinanced previously. Third, your remaining loan term — how many months you have left. If you took a 30-year mortgage five years ago, you have 300 months remaining.
Also note your current monthly principal and interest payment. This is the baseline against which you will compare the new loan's payment. Do not include the tax and insurance components, as those will not change with a refinance.
Get Your New Rate Quote
Contact at least three lenders for refinance quotes on your current loan balance. The quotes will include an interest rate, points, and estimated closing costs. Points are prepaid interest — one point equals 1% of the loan amount and buys down the rate by a small amount. Ask each lender to quote you a rate with zero points so you are comparing apples to apples.
Your credit score, current loan-to-value ratio, income, and debt-to-income ratio all affect the rate you are offered. Check your credit score before applying. If it has improved since you originally borrowed, you likely qualify for a better rate. If it has declined, your savings may be smaller than the advertised rates suggest.
Do not just look at the rate — ask for a Loan Estimate, which lenders are required to provide. This standardized document breaks out all costs and allows direct comparison between lenders.
Calculate the Monthly Savings
Use a mortgage calculator to find the principal and interest payment on your remaining balance at the new rate and the same remaining term. Then subtract that from your current payment. The difference is your monthly savings.
For example, if your remaining balance is $250,000 with 25 years left at 7.5%, your current payment is about $1,848. A new loan at 6.5% for 25 years on $250,000 produces a payment of about $1,689. The monthly savings is approximately $159.
Be careful about one common mistake: comparing a new 30-year loan to the remaining payments on your current mortgage. If you have 22 years left on your current mortgage and you refinance into a new 30-year loan, your monthly payment might drop but your total interest paid could actually increase because you have extended your payoff timeline by 8 years.
Estimate the Break-Even Point
Divide your total closing costs by your monthly savings to find the break-even point in months. If closing costs are $7,000 and you save $159 per month, the break-even is 44 months — about 3.7 years. If you stay in the home longer than that, you come out ahead. If you sell or refinance again before then, you lose money on the deal.
Include all costs in your closing cost estimate — origination fees, appraisal, title insurance, government recording fees, prepaid interest, and escrow setup. The Loan Estimate document from each lender breaks these out. Add every line item.
Some lenders offer to roll closing costs into the loan balance. This eliminates the upfront out-of-pocket cost but increases your loan balance and monthly payment. In this case, compare your new payment (with costs rolled in) to your current payment to find the true savings after accounting for the higher balance.
Factor In How Long You Will Stay
The break-even calculation is only useful if you honestly assess how long you plan to remain in the home. If you expect to move within two to three years for work, family, or lifestyle reasons, a break-even point of four years means the refinance costs you money overall.
Also consider the possibility of a future refinance. If you refinance now and rates drop again in two years, you would want to refinance again. Each refinance resets the break-even clock and costs new closing fees. For people who may refinance multiple times, lower break-even points matter more.
Write down your final answer: total closing costs, monthly savings, break-even in months, and your honest assessment of how long you will stay. If your planned stay exceeds the break-even by a comfortable margin, refinancing is likely worthwhile.