What this calculator does
Refinancing costs money upfront and saves money monthly. The breakeven is simply how long it takes the saving to cover the cost, and if you sell or refinance again before that point you have lost on the deal.
The trap is the term reset. Dropping from 7 to 6.5 per cent saves $195.11 a month and breaks even in 25.6 months, but stretching 27 remaining years back out to 30 actually raises total interest from $429,982.13 to $446,405.71.
The formula
Both payments are calculated from the current balance, one on the existing rate and remaining term, one on the new rate and new term. The closing costs divided by the monthly saving give the breakeven in months.
| Term | Meaning |
|---|---|
| Breakeven period | Months of saving needed to recover the closing costs. |
| Term reset | Refinancing to a fresh 30 year term, which lowers payments but can raise total interest. |
| Closing costs | Fees to refinance, which are the investment being recovered. |
The inputs explained
| Field | What to enter |
|---|---|
| Current loan balance ($) | The current loan balance, which is what gets refinanced. |
| Current interest rate (%) | The interest rate on the current loan. |
| Years remaining on current loan | Years remaining on the current loan. |
| New interest rate (%) | The interest rate on the new loan. |
| New loan term | The term of the new loan. Setting this equal to the years remaining avoids the term reset. |
| Closing costs to refinance ($) | Total closing costs to refinance. |
When to use it
Deciding whether a rate drop is worth acting on
A small rate cut may not recover its costs before you move.
Comparing lender offers
A lower rate with higher fees may break even later than a higher rate with none.
Checking the total interest effect
A lower payment is not the same as less interest when the term restarts.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How fast does each rate cut pay for itself?
The same refinance at three new rates.
| New rate | Breakeven period | Monthly saving |
|---|---|---|
| 6.5% | 25.6 months (2.1 years) | $195.11 |
| 6% | 16.2 months (1.3 years) | $308.93 |
| 5.5% | 11.9 months (1.0 years) | $420.09 |
Questions
Does a lower rate always mean less interest?
No, and this is the most common mistake. Refinancing 27 remaining years into a fresh 30 year term adds three years of payments, which at a half-point saving actually increases total interest by over $16,000 on this loan.
How do I avoid the term reset?
Refinance into a term matching what remains, or keep paying the old payment amount on the new loan. The second approach captures the rate saving as a faster payoff rather than as lower monthly cost.
What if the costs are rolled into the loan?
Then you pay interest on them for the life of the loan, which makes the true breakeven later than this calculation suggests. Paying costs upfront is cheaper where the cash is available.
Is there a rule of thumb for when to refinance?
The old guidance was a full percentage point, but that ignores loan size and costs. On a large balance a quarter point can break even quickly; on a small one a full point may not. The breakeven period is the figure that actually matters.
For buying the rate down instead, see the mortgage points calculator. For the payment itself, see the loan payment calculator.