Last updated: 2026-05-25

Mortgage refinancing explained

Mortgage refinancing is the replacement of an existing home loan with a new one — typically to capture a lower interest rate, change the loan term, or extract equity (cash-out). The deciding question is not how much lower the new monthly payment is, but whether the monthly savings are large enough to recoup the closing costs before the home is sold or the loan is refinanced again. That figure is the break-even month: the point at which accumulated savings cover the upfront cost of the refinance. Closing costs are charged up front, so a refinance only saves money once those costs have been recovered.

This calculator takes the current loan terms and a proposed refinance and returns:

• The new monthly P&I payment (rolling closing costs and any cash-out into the new principal)
• Monthly savings vs. the current loan
• Break-even month — closing costs ÷ monthly savings
• Lifetime savings — total paid on the current loan to its end vs. the new loan to its end
• A balance-trajectory overlay showing both loans month-by-month

The defaults model the 2024–2026 US rate cycle: a $250,000 balance at 7% (locked in 2023, 28 years remaining) refinancing to 6% on a fresh 30-year term with $7,500 closing costs.

The math

Monthly principal & interest (PMT)

The standard fully-amortizing payment formula:

Where L is the loan amount, r is the annual rate (6% = 0.06), and n is the number of months in the term.

The refinance principal is current balance + closing costs + cash-out. The most common structure rolls closing costs into the new loan rather than paying them at the table; set closing costs to $0 to model paying them out of pocket.

Break-even month

When monthly savings are zero or negative, the refinance does not pay back from the rate change alone. This is common when significant closing costs are rolled into a loan with a small rate drop, or when refinancing to a longer term.

Lifetime savings

n₀ is the months remaining on the current loan, n₁ is the new term in months. The cash-out term excludes borrowed money from the savings figure — it is debt, not savings.

This figure exposes the trade-off in refinancing into a fresh 30-year term: the monthly payment drops, but total interest paid over the longer horizon often exceeds what keeping the current loan would have cost. A negative lifetime savings number means a lower monthly payment but more total interest.

When refinancing pays off

Rate-drop guidelines

These common spreads serve as a rough first screen, not a substitute for the break-even figure:

• 0.5% drop: marginal; worthwhile mainly with a 5+ year stay and low closing costs
• 1% drop: the traditional threshold — most refinances at this spread pay back in 2–3 years
• 1.5%+ drop: usually pays off with a 2+ year stay

Closing costs and remaining term matter as much as the rate spread. A 1% drop on a loan with only 8 years left is rarely worth it; the same 1% drop with 28 years remaining usually is.

Verdict bands in this calculator

• Break-even < 24 months: refinancing pays off when the home is held past that point
• 24–60 months: depends on how long the home is kept
• > 60 months or negative monthly savings: refinancing usually does not pay off

The 24-month and 60-month thresholds reflect typical US mobility patterns: the median homeowner moves about every 13 years, but recent buyers often move within 5–7 years. A 48-month break-even paired with a likely relocation in 3 years loses money on the refinance.

Cash-out refinance — different math

A cash-out refinance increases the loan balance to extract equity — the extra amount is paid out in cash at closing. The key differences from a rate-and-term refinance are:

• The new loan amount = current balance + closing costs + cash-out
• Lifetime savings subtracts cash-out — cashing out $30k is not a $30k saving but a $30k loan repaid with interest
• Rate is usually 0.25–0.5% higher than a rate-and-term refinance at the same lender; this belongs in the new rate field
• Loan-to-value (LTV) cap is typically 80% for cash-out from a primary residence — a higher ratio means private mortgage insurance (PMI) or denial

Cash-out is best suited to high-return uses: paying off higher-rate debt (credit cards near 22%), funding home improvements that add value, or consolidating student loans. Using it for cars, vacations, or general spending carries up to 30 years of mortgage interest on consumer purchases.

Closing-cost composition

US refinance closing costs typically run 2–6% of the loan amount, broken into:

• Origination/lender fee: 0.5–1.5% of the loan
• Appraisal: $400–$700 (sometimes waived for streamline refis)
• Title insurance + settlement: $1,000–$3,000 depending on state
• Recording fees and transfer taxes: varies by state — high in NY, FL; low in CA
• Prepaids: property tax and homeowners insurance escrow setup
• Points (discount points): optional up-front payment to lower the rate further

Streamline refinances (FHA, VA, USDA) skip the appraisal and most underwriting, which cuts costs substantially. A current FHA or VA loan may qualify for the corresponding streamline option.

What this tool doesn't model

• Tax effects of mortgage interest: the federal mortgage interest deduction reduces the effective rate for itemizers, currently a minority of households since the Tax Cuts and Jobs Act (2017) raised the standard deduction. The displayed savings are pre-tax.
• PMI changes: refinancing into a loan with PMI (or out of PMI by hitting 80% LTV) materially shifts monthly cost — model PMI changes separately.
• Adjustable-rate (ARM) scenarios: this calculator treats both loans as fixed for their full term. For ARM refis, run a stress test at the lifetime cap rate.
• Recasting (vs. refinancing): when the goal is simply to lower monthly payments after a lump-sum principal reduction, a loan recast is typically cheaper than a refinance.

For a realistic estimate, the closing costs should come from an actual lender's Loan Estimate rather than a teaser ad, the new term should match the target payoff date (not automatically 30 years), and both the break-even month and the lifetime savings figure are worth checking together. A refinance that breaks even in 18 months but adds $40k in total interest by resetting the schedule is not a net gain. To verify the new payment amount independently, see Mortgage Payment Calculator; to size a new purchase before refinancing equity, see Mortgage Affordability Calculator.