How This Calculator Works
Refinancing math requires three calculations: current loan payment, new loan payment, and break-even.
Current loan monthly payment (remaining balance at current rate for remaining months):
Pcurrent = B × [ rc(1+rc)m / ((1+rc)m − 1) ]
Where:
- B = current outstanding balance
- rc = current monthly rate (current APR ÷ 12)
- m = remaining months on current loan
New loan monthly payment (same balance at new rate for new term):
Pnew = B × [ rn(1+rn)n / ((1+rn)n − 1) ]
Where:
- rn = new monthly rate (new APR ÷ 12)
- n = new loan term in months
Monthly savings:
Monthly Savings = Pcurrent − Pnew
Break-even (months to recover closing costs):
Break-Even = Closing Costs ÷ Monthly Savings
If break-even exceeds the time you plan to keep the loan, refinancing does not pay.
Total savings calculation requires care. The cleanest approach compares total future payments on both loans, accounting for the fact that the new loan may have a longer term:
Total Savings = (Pcurrent × m) − (Pnew × n) − Closing Costs
If the new loan has a longer term than what remains on the current loan (n > m), Total Savings may be negative even with monthly savings — you are paying less per month but for more months.
A critical subtlety: if you refinance mid-loan, you have already paid some interest. The sunk interest on the current loan is irrelevant — only future payments matter for the decision. The calculator correctly uses remaining balance and remaining months, not original loan amount. For cash-out refinances (where you borrow more than the current balance), only the portion equal to the current balance should be used for the apples-to-apples comparison; the additional cash is a separate borrowing decision.
When to Use This Calculator
Use the loan refinance calculator when you are:
- Considering a mortgage refinance after rates drop or your credit improves
- Refinancing an auto loan to capitalize on a better rate or remove a co-signer
- Refinancing student loans (federal to private carries unique risks — losing IDR and PSLF)
- Refinancing personal loans or consolidating credit card debt into a lower-rate loan
- Deciding between a rate-and-term refinance (lower rate, same balance) versus a cash-out refinance (borrow against equity)
- Evaluating whether to pay points (upfront fee) to lower the rate on a new loan
A useful rule: refinance when you can reduce APR by at least 0.75–1 percentage point AND you expect to keep the loan longer than the break-even period. For mortgages specifically, divide closing costs by monthly savings — if the result is under 24 months and you plan to stay 5+ years, refinance is typically a clear win.
Example Calculation
You have a mortgage with a current balance of $240,000, an APR of 6.75%, and 25 years (300 months) remaining. You are considering refinancing into a new 25-year loan at 5.50% APR with $4,500 in closing costs.
Current loan:
- Monthly payment: $240,000 × [0.005625 × (1.005625)300 ÷ ((1.005625)300 − 1)] = $1,656
- Total remaining payments: $1,656 × 300 = $496,800
New loan:
- Monthly payment: $240,000 × [0.004583 × (1.004583)300 ÷ ((1.004583)300 − 1)] = $1,469
- Total payments: $1,469 × 300 = $440,700
- Plus closing costs: $440,700 + $4,500 = $445,200
Decision metrics:
- Monthly savings: $1,656 − $1,469 = $187/month
- Break-even: $4,500 ÷ $187 = 24 months (2 years)
- Total savings: $496,800 − $445,200 = $51,600 over 25 years
Decision: If you plan to stay in the home for more than 2 years, refinancing is clearly worth it. The $4,500 upfront cost is recovered in 24 months, and you save $51,600 over the life of the loan.
Caveat: If you refinance into a new 30-year loan instead of 25, your monthly payment drops further (to about $1,363, saving $293/month), but you have added 5 years of payments. Total cost: $1,363 × 360 = $490,680 + $4,500 = $495,180 — almost identical to staying put. Lower monthly payments do not always mean lower total cost when the term extends.