Refinance vs Keep Existing Loan
Is refinancing worthwhile?
About this calculator
Refinancing replaces your current loan with a new one, usually to get a lower interest rate or a lower monthly payment. It is not free: a new loan comes with closing costs, and a new full-length term can lower the payment while stretching the debt out for more years. Whether refinancing is worthwhile depends on how much the rate falls, what the new loan costs to set up, and how long you will keep it. This calculator compares the two loans month by month and shows how much refinancing saves or costs over the years you expect to keep the loan.
How to use this calculator
Enter your Current Loan Balance, the Current Interest Rate and the Remaining Term in years and months; your current monthly payment of principal and interest is shown below the term. Then enter the New Interest Rate and New Loan Term you have been offered and the Closing Costs from the lender's loan estimate. Tick Roll closing costs into the new loan if you will add them to the balance instead of paying them in cash. Finally, enter the Years You Expect to Keep the Loan, which is how long until you expect to sell, pay it off or refinance again. Every result updates as you type, and the inputs are saved in the page address so you can bookmark or share a scenario.
The method
Both loans are amortized month by month with a fixed payment that repays the balance over its term. The common shortcut divides the closing costs by the monthly savings to get a payback period, shown here as Simple Payback. That shortcut ignores two things: a longer new term repays principal more slowly, and closing costs rolled into the loan are owed with interest. So the main figures use a fuller comparison. At any month, the cost of keeping your loan is the payments made so far plus the balance you still owe; the cost of refinancing is the closing costs paid in cash, plus the new payments made so far, plus the new balance still owed. Net savings are the first minus the second, and the break-even is the first month they reach zero. The headline is the net savings at the end of the years you expect to keep the loan.
Worked example using the default values
A $300,000 balance at 7.25% with 27 years left has a payment of $2,113. Refinancing into a new 30-year loan at 6.0% drops the payment to $1,799, a monthly saving of $314, for $6,000 in closing costs paid in cash. The simple payback is 20 months, and the fuller break-even is also month 20. Over 7 years you would pay $177,457 on the current loan and still owe $267,288; on the new loan you would pay $151,087 plus the $6,000 closing costs and still owe $268,918. Refinancing saves $18,740 over 7 years. Rolling the closing costs into the loan instead raises the payment to $1,835, moves the break-even to month 22 and lowers the saving to $16,340.
Interpreting the results
If the years you expect to keep the loan run past the break-even month, refinancing pays for itself; if you might move before then, you could lose money on it. The comparison table shows where the saving comes from, and the chart shows the net savings at the end of each year, starting below zero by the amount of the closing costs. Interest over the life of the loan is shown for reference, but it can mislead: a new 30-year loan may charge more total interest than your current loan even when it saves you money over the years you actually keep it, and vice versa.
Practical tips
Get loan estimates from several lenders and compare the closing costs as well as the rate, since lender fees vary widely. If you can afford it, choose a new term close to your remaining term, or keep making your old payment on the new loan, so the lower rate goes toward paying down principal instead of stretching the loan out. Points paid to buy a lower rate are part of the closing costs here, so try the offer with and without points. A cash-out refinance borrows more than you owe, which this calculator does not model.
Limitations
The comparison counts dollars at face value and does not discount future payments, so it does not account for what you could earn on the money saved each month. It covers principal and interest only: taxes, insurance and mortgage insurance usually stay similar, but removing or adding mortgage insurance can change the answer. It also ignores the mortgage interest deduction and any prepayment penalty on the current loan. Escrow refunds and prepaid items at closing are not costs of refinancing, so leave them out of the closing costs.
Frequently Asked Questions
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