Refinancing your mortgage can lower monthly payments, reduce interest costs, or shorten your loan term. But before deciding, it’s critical to calculate whether refinancing is worth it. This guide walks you step by step through refinancing math—helping you compare old vs. new loans, factor in closing costs, and determine your true savings. For the fundamentals of mortgage math, see our learn the process of calculating mortgage payments
1. Gather Key Information
To calculate refinancing properly, collect the following details for both your current loan and the new loan offer:
Current loan balance
Interest rate (current vs. new)
Loan term (remaining vs. new)
Monthly payment (principal + interest)
Closing costs for the refinance
2. Calculate Your Current Loan Payment
Use the standard mortgage formula (or a calculator):
M = P × [ r × (1 + r)^n ] / [ (1 + r)^n – 1 ]
Where:
M = monthly payment
P = loan balance
r = monthly interest rate (annual ÷ 12)
n = number of payments remaining
This gives you your existing monthly cost for comparison.
3. Calculate the New Loan Payment
Run the same calculation with the new loan terms (principal = current balance, new interest rate, and new term).
Example:
Balance = $250,000
Old Rate = 6.5% → ≈ $1,580/month
New Rate = 5.5% → ≈ $1,420/month
Monthly Savings = ≈ $160
4. Factor in Closing Costs
Refinancing isn’t free. Common costs include lender fees, appraisal, and title insurance (typically 2–5% of loan balance).
Example:
Closing Costs = $4,800
Monthly Savings = $160
Break-Even Point = $4,800 ÷ $160 = 30 months (2.5 years)
If you plan to stay in the home longer than 2.5 years, refinancing makes sense.
5. Compare Total Interest Costs
Beyond monthly payments, look at lifetime interest:
A lower rate saves interest.
But extending a loan term (e.g., restarting at 30 years) can add back costs even with lower payments.
Tip: Always compare total interest with refinancing vs. staying put.
6. Consider Extra Payment Strategies
If your refinance lowers the payment, you can keep paying your old (higher) amount. The difference will go to principal, cutting your loan term dramatically.
Example:
New payment = $1,420
Old payment = $1,580
If you keep paying $1,580, you’ll pay off years faster and save tens of thousands in interest.
7. Step-by-Step Checklist
Calculate your current monthly payment.
Calculate your new monthly payment.
Subtract to find savings.
Divide closing costs by monthly savings (break-even analysis).
Compare total interest over the life of both loans.
Factor in how long you plan to stay in the home.
Conclusion
Refinancing calculations go beyond comparing rates—you need to consider monthly savings, break-even time, and total lifetime costs. By working through these steps, you can see clearly whether refinancing will help you achieve your financial goals.