Worked examples — the math, step by step
Every number below comes from the standard amortization (PMT) formula. Run them in the calculator to verify.
Example 1 — the monthly payment (PMT formula)
Balance $300,000, rate 7.5%, 300 months remaining.
M = P · r(1+r)ⁿ / ((1+r)ⁿ − 1), r = 0.075/12 = 0.00625, n = 300
M = 300,000 · 0.00625 · (1.00625)³⁰⁰ / ((1.00625)³⁰⁰ − 1)
M = $2,216.97 / month
- Monthly rate: 7.5% ÷ 12 = 0.625%.
- Growth factor: (1.00625)300 = 6.4958.
- Numerator: 300,000 × 0.00625 × 6.4958 = 12,179.66.
- Denominator: 6.4958 − 1 = 5.4958.
- Payment: 12,179.66 ÷ 5.4958 = $2,216.97.
Example 2 — break-even from monthly savings
Same loan refinanced to 6.0%, new 30-year (360-month) term, $6,000 closing costs.
New M = 300,000 · 0.005 · (1.005)³⁶⁰ / ((1.005)³⁶⁰ − 1) = $1,798.65
Monthly savings = 2,216.97 − 1,798.65 = $418.32
Break-even = 6,000 ÷ 418.32 = 14.3 months ≈ 1.2 years
- Compute the new payment with the PMT formula at 6.0% / 360 months → $1,798.65.
- Subtract from the old payment → $418.32/month saved.
- Divide closing costs by monthly savings → 14.3 months.
- Verdict: only refinance if you'll keep the loan longer than ~1.2 years.
Example 3 — the total-cost lens (why payment alone lies)
Same refinance as Example 2, compared over a 10-year horizon.
Old loan, 10 yrs: paid $266,036.82 · interest $205,189.36
New loan, 10 yrs: paid $215,838.19 · interest $166,895.36
Net savings = 266,036.82 − (215,838.19 + 6,000) = $44,198.63
- Simulate both loans month-by-month for 120 payments (amortization schedule).
- Total paid on the old loan: $266,036.82 (of which $205,189.36 is interest).
- Total paid on the new loan: $215,838.19 + $6,000 upfront costs.
- Net kept: ≈ $44,199 — the number that actually matters.
- Counter-example: a 6.0% → 6.5% "refi" with a 360-month reset saves only $36.70/month but takes 109 months to break even — a lower payment that barely pays. Always check break-even and total cost.
Frequently asked questions
Straight answers to the questions borrowers actually ask about refinancing.
When does refinancing a mortgage make sense?
Refinancing makes sense when three things line up: (1) you can get a meaningfully lower rate — often at least 0.75 to 1 percentage point below your current rate; (2) you plan to stay in the home (or keep the loan) longer than the break-even point, i.e. closing costs divided by monthly savings; and (3) your credit and equity qualify you for the quoted rate. It also makes sense when your goal isn't a lower payment at all — for example, switching from an adjustable-rate mortgage to a fixed rate, removing PMI after your equity passes 20%, or shortening the term to build equity faster.
How do you calculate the break-even point on a mortgage refinance?
Divide your total closing costs by your monthly payment savings: break-even (months) = closing costs / monthly savings. Example: $6,000 in closing costs and $418/month in savings gives 6,000 / 418 = 14.3 months — about 1.2 years. If you sell or refinance again before that point, the refinance loses money. Note the formula assumes constant savings; the calculator above refines it with a full amortization simulation over your chosen horizon.
What is the 1% rule for refinancing a mortgage?
The 1% rule says refinance only if the new rate is at least 1 percentage point lower than your current rate. It's a rough rule of thumb, not a law — it ignores closing costs, your remaining term, and how long you'll stay. A 0.5% drop with $0 closing costs and a 10-year stay can beat a 1.25% drop with $9,000 in fees and a 2-year stay. Always run the break-even math instead of relying on the rule alone.
Is a no-closing-cost refinance a good deal or a trap?
Neither automatically — it's a trade. In a true no-closing-cost refinance the lender covers your costs via a credit, but charges a higher rate (often ~0.25% more) to fund it. Your break-even is $0 months, which looks great, but over a long stay you can pay more total interest than a lower-rate loan with upfront costs. The trap is comparing only the break-even: compare the total cost over your expected stay instead. The scenario presets above quantify exactly this trade-off.
Break-even vs total cost — which one matters more?
Both, for different questions. Break-even answers 'how long until I'm ahead?' — use it against your moving plans. Total cost answers 'how much do I actually keep over X years?' — use it to compare offers, because a refinance can have a fast break-even yet cost more overall (for example, when the new loan resets your remaining 22 years back to 30). This calculator shows both: the break-even hero number and the full total-cost comparison with interest old-vs-new.
How much does it cost to refinance a mortgage?
Refinance closing costs typically run 2% to 5% of the loan amount — on a $300,000 loan, roughly $6,000 to $15,000. The two buckets are points (optional prepaid interest: 1 point = 1% of the loan, buys the rate down) and lender/third-party fees (origination, appraisal, title, recording). Points lower your rate but lengthen the break-even; enter them separately in the calculator to see the effect. Tax note: discount points paid on a refinance are generally deducted ratably over the life of the loan (unlike a purchase, where they may be deductible in the first year) — confirm with a tax professional.
How long does it take to break even on a refinance?
With typical numbers — $4,000 to $8,000 in costs and $150 to $400 in monthly savings — break-even lands around 1 to 3 years. It stretches longer when costs are high, the rate drop is small, or you roll costs into the loan (which raises the new balance). It shrinks with no-closing-cost structures, where break-even is immediate but the rate is higher. Your personal number depends on all five inputs, which is why the calculator computes it live.
Is it worth refinancing if I plan to sell or move soon?
Usually not. If you'll sell before the break-even point, you pay the closing costs but leave before the monthly savings repay them — a guaranteed loss. As a rule: don't refinance if your expected stay is shorter than the break-even period. Enter your planned stay in the calculator and the verdict card will tell you directly whether the math survives your timeline.
Does refinancing restart the clock on my mortgage?
Often, yes — and it's the most overlooked cost. If you have 22 years left and refinance into a new 30-year loan, your payment drops partly because you're stretching payments over 8 extra years, not just because the rate fell. You can pay more total interest despite the lower rate. That's why this tool compares total interest old-vs-new over your horizon (the 'total-cost lens'), not just the monthly payment. You can also refinance into a matching term (e.g. 25 years left -> new 25-year loan) to avoid the reset.
Should I roll closing costs into the new loan?
Rolling costs in means $0 out of pocket today, but the costs get added to your balance and accrue interest for the life of the loan — typically adding a few thousand dollars in extra interest and stretching the break-even by a few months. Paying cash keeps the balance (and total interest) lower. Toggle 'roll closing costs into loan' in the calculator to see both versions side by side before you decide.
What is the difference between discount points and lender credits?
They're mirror images. Discount points: you pay upfront (1 point = 1% of the loan) to buy a lower rate — best if you'll stay well past break-even. Lender credits: the lender pays part of your closing costs in exchange for a higher rate — best if you'll move or refinance again soon. The no-closing-cost scenario preset above is essentially a full lender credit; compare its total cost against a points-based quote over your actual stay.
Is cash-out refinancing worth it?
A cash-out refinance replaces your loan with a bigger one and hands you the difference as cash — usually at a higher rate than a plain rate-and-term refinance. It can make sense for high-return uses of the cash (e.g. paying off 20%+ credit card debt), but the total-cost lens is brutal: you pay interest on the extra balance for decades. Use the cash-out input and compare net savings over your horizon before deciding; never judge it on the monthly payment alone. Alternative: a HELOC or home-equity loan keeps your existing first mortgage — and its rate — intact while adding a smaller second lien, which is often cheaper when your current rate is already low.
How many times can you refinance a mortgage?
There is no legal limit — you can refinance as often as lenders approve you. But every refinance has closing costs and resets (or extends) amortization, so serial refinancing only works if each round's break-even fits inside the time until the next one. Many lenders also impose 'seasoning' requirements (often 6 months) before they'll refinance a loan they just funded.
Should I refinance or just make extra principal payments?
Extra payments cut total interest with zero closing costs and no paperwork — they're the low-risk baseline. Refinancing wins when the rate drop is large enough that the monthly savings repay the closing costs well inside your stay. A useful tiebreaker: compute your refinance net savings over your horizon, then compare it against the interest saved by putting the same closing-cost dollars toward extra principal instead. The methodology section shows the exact formulas. A third option is a recast (reamortization): a large lump sum toward principal plus a small fee resets your payment on the same loan — no new rate and no full closing costs.
What credit score do you need to refinance?
Conventional refinance minimums are typically 620, FHA around 580, but the best rates usually require 740+. Even a 20- to 40-point improvement can move your rate enough to change the break-even math — if your score has improved since you got the current loan, re-run the calculator with the better rate you might now qualify for.
Is this calculator for student loan refinancing too?
No — this tool is mortgage-specific: it models remaining term, points, lender credits, PMI-relevant equity mechanics, and home-sale timelines. Student loan refinancing is a different decision (federal protections, income-driven plans, and forgiveness can be lost permanently when you refinance federal loans). For that, see our student loan calculator's refinance break-even mode, which covers the federal-vs-private trade-offs.