Is refinancing worth it? Run the break-even first
A refinance is worth it when you keep the new loan past its break-even month. On this example, a one-percentage-point drop pays off at month 24, and you'd be $14,756 ahead after 7 years. A quarter-point drop never pays off.
| New rate | Monthly savings | Shortcut break-even | True break-even | Net after 7 years |
|---|---|---|---|---|
| 7% | $96 | Month 63 | Never | -$1,609 |
| 6.75% | $147 | Month 41 | Month 49 | $3,857 |
| 6.5% | $199 | Month 31 | Month 32 | $9,312 |
| 6.25% | $249 | Month 25 | Month 24 | $14,756 |
| 5.75% | $349 | Month 18 | Month 16 | $25,607 |
The shortcut column divides costs by monthly savings. The true break-even also counts what you still owe on each loan, since a lower payment that pays down less principal isn't all savings. That's why the two columns can disagree.
Costs move this as much as the rate. A Federal Reserve consumer guide, last updated in 2008, said fees of 3% to 6% of the balance weren't unusual, which would be $9,300 to $18,600 here. At the high end, break-even moves to month 75. Use the real total from your Loan Estimate, not a percentage.
A lower payment can still cost you more
Restarting the clock is the trap. Take a $200,000 balance at 7% with 15 years left. Refinancing to 6% for 30 years cuts the payment from $1,798 to $1,199, and with $5,000 in costs the shortcut says you break even in 9 months. Yet you'd pay $108,099 more in total interest, because the debt now lasts twice as long.
The first payment shows why. On the old loan, $631 goes to principal. On the new one, just $199 does. The true break-even for this refinance is never, not month 9. The Federal Reserve guide makes the same point: refinancing late in a loan restarts amortization. If you take the same 6% rate for 15 years instead, you'd save $19,789 in interest and break even at month 31, and your payment would still drop by $110 a month. The longer loan can still be the right call if you need the room in your budget, as long as you know what that room costs.
What refinancing to 15, 20, or 25 years does
Shortening the term saves far more than shaving the rate. At the same 6.25% rate, the example loan costs $246,672 less interest on a 15-year term, against $37,972 on 30 years. The price is a higher payment. Current payment: $2,158.
| New term | Monthly payment | Change from today | Change in total interest |
|---|---|---|---|
| 30 years | $1,909 | -$249 | -$37,972 |
| 25 years | $2,045 | -$113 | -$111,624 |
| 20 years | $2,266 | +$108 | -$181,305 |
| 15 years | $2,658 | +$500 | -$246,672 |
What a cash-out refinance really costs
The real rate on cash-out money can be much higher than the quoted rate, because you also reprice the debt you already had. Say you owe $310,000 at 5.5% and take $50,000 out at 6.5% for 30 years, with $6,000 in costs. You receive $44,000, and your payment rises by $465 a month, then you make 24 more payments of $2,275 after your old loan would have ended.
Treated as a loan of its own, that cash costs about 12.7% a year, nearly twice the 6.5% on the offer. Total interest rises by $160,903. Compare that figure with other ways to borrow the money, since your current low rate is what you're giving up. Your home also secures the larger debt. VA cash-out loans add a funding fee of 2.15% on first use or 3.3% after, unless you're exempt.
Does a no-cost refinance really cost nothing?
No. The Consumer Financial Protection Bureau (CFPB) says lenders usually cover the costs either by charging a higher rate and giving you a credit, or by adding the costs to your loan. Which way wins depends on how long you stay, as this example shows. The quarter-point rate bump for the credit is an example, not a quote.
| Option | Monthly savings | Net after 3 years | Net after 10 years | Lifetime net |
|---|---|---|---|---|
| Pay $6,000 upfront, 6.25% | $249 | $3,161 | $22,743 | $31,972 |
| Add costs to the loan, 6.25% | $212 | $2,056 | $19,256 | $24,677 |
| Lender credit, 6.5%, $0 costs | $199 | $6,829 | $20,991 | $19,726 |
If you might move or refinance again soon, the higher-rate option can come out ahead. If you'll stay for decades, paying upfront tends to win. Points work the other way around: each one costs 1% of the loan to buy a lower rate, so test them in the advanced settings against how long you'll stay.
What this calculator leaves out
It compares principal and interest only, so escrow for taxes and insurance is left out because those bills don't change with the loan. It assumes fixed rates on both loans, so it can't weigh an adjustable-rate loan. Dropping PMI isn't counted either, though it can be a real saving. If your current loan is FHA with under 10% down, its annual premium lasts the full term, so a refinance to a conventional loan may remove it. Subtract that from your comparison by hand.
Check your current loan for a prepayment penalty, which the Federal Reserve guide notes pushes your break-even further out. If you have a VA loan, ask about an interest rate reduction refinance, which has a 0.5% funding fee. If you're behind on payments or can't get a clear answer, a HUD-approved housing counselor can help, often at little or no cost. For comparing two offers, try the APR calculator. To compare with sending extra money instead, use the mortgage payoff calculator.
Common questions
How much does it cost to refinance a mortgage?
It varies by lender and loan, so the only reliable number is the total on your Loan Estimate. A Federal Reserve consumer guide from 2008 said 3% to 6% of the balance wasn't unusual, and fees have changed since. Request Loan Estimates from several lenders for the same kind of loan to compare.
Do I need to give personal information to use this?
No. It asks for loan numbers only: balance, rates, years, and costs. You don't enter a name, an address, or a credit score, so the result isn't a rate quote. Only a lender can give you one.
Can I deduct points on a refinance?
Generally not all at once. The IRS says points paid to refinance are generally deducted ratably over the life of the loan, unlike points on a home purchase, which can often be deducted in the year you pay them. You need to itemize to get either benefit. A tax professional can apply this to your return.
Does this work for refinancing a car or student loan?
Not well. The math is similar, but the settings here assume a mortgage. Use the auto loan calculator or the student loan calculator for those.
Why does the calculator say my lifetime net is negative when my payment drops?
Because a lower payment over more years can add up to more dollars. Lifetime net compares every payment on both loans, plus your upfront costs. Try the "Match your remaining term" what-if to see how much of the savings came from stretching the loan.
Sources
- A Consumer's Guide to Mortgage Refinancings (last updated 2008) · Federal Reserve Board
- Is there such a thing as a no-cost or no-closing loan or refinancing? · Consumer Financial Protection Bureau
- Topic no. 504: Home mortgage points · Internal Revenue Service
- VA funding fee and loan closing costs · U.S. Department of Veterans Affairs
- Mortgagee Letter 2023-05: FHA annual mortgage insurance premiums · U.S. Department of Housing and Urban Development
- Find a housing counselor · Consumer Financial Protection Bureau