Refinance calculator

Is it worth refinancing my mortgage?

A refinance is worth it in money terms when what you save on payments outweighs the fees before you sell, move or refinance again. The calculator answers that with a break-even month and with the net gain or loss over the years you plan to keep the loan.

With the defaults, a $280,000 balance at 7.25% with 27 years left costs $1,971.74 a month. Refinancing to 6% over 30 years, with $5,000 of fees paid upfront, cuts the payment to $1,678.74, a saving of $293.00 a month. Counting payments, fees and the balance still owed, the new loan is $1,520 behind after one year, ahead from month 18, $5,287 ahead after three years and $18,091 ahead after seven.

The chart beside the result plots that net position year by year, with a dashed line at the break-even and another at your horizon. Whether to refinance also depends on things the calculator cannot see, such as how long you will keep the home and what else the fees could pay for.

How do you calculate the break-even point on a refinance?

The quick version divides the fees by the monthly saving: $5,000 / $293.00 = 17.1 months on the defaults. The calculator shows this as the simple break-even, but its headline uses a fuller test, because the simple one can mislead.

For every month m it compares two positions:

• Keep the current loan: payments made so far plus the balance still owed.
• Refinance: payments on the new loan so far, plus its balance still owed, plus any fees paid upfront.

The break-even is the first month the first total is at least as large as the second. Counting the balance matters: a new loan with a longer term has a lower payment partly because it repays principal more slowly, and the simple test counts that slower repayment as a saving. The fuller test does not. The two can also disagree the other way. On the pound example below, the simple test says 13.2 months but the fuller test says month 9, because the lower rate also repays principal faster.

The test ignores what the fees or the savings could earn elsewhere, so it is a payback period, not a discounted one.

What happens when you reset the term?

Taking a new 30-year loan when 27 years are left on the old one lowers the payment twice: once from the lower rate and again from spreading the balance over three more years. On the defaults, the new rate over the remaining 27 years would cost $1,747.16 a month with $286,080 of total interest. Over 30 years it costs $1,678.74, $68.42 a month less, but total interest rises to $324,347, an extra $38,267.

The panel next to the chart shows this for your inputs. The table below runs several new rates on the default loan, with the term reset to 30 years and kept at 27. The last column compares every remaining payment of the current loan with every payment of the 30-year loan plus fees, over each loan's full life.

At 6.75%, the simple test says fees are recovered in 32.1 months, the fuller test says month 47, and over the full term the reset loan costs $19,942 more, because three extra years of payments outweigh the lower rate.

Should fees be paid upfront or added to the loan?

Adding fees to the loan avoids the upfront cost, but you then pay interest on them for the whole term. On the defaults, rolling the $5,000 into a $285,000 loan raises the new payment from $1,678.74 to $1,708.72. The break-even moves from month 18 to month 19, and the gain after seven years falls from $18,091 to $16,091.

With fees added to the loan, the simple fees-divided-by-saving test has nothing to divide, because no fees are paid upfront, which is one more reason the calculator counts the balance. Choose Added to the new loan under Fees are, and the working shows the larger loan and its payment.

Remortgage or refinance: is it the same thing?

Yes, in arithmetic. Both mean replacing the loan on a home with a new one, at a new rate and often a new term. In the UK, moving to a new deal is called remortgaging, and staying with your current lender on a new rate is called a product transfer. In the US, the word is refinancing; a rate-and-term refinance changes the rate or the term, and a cash-out refinance borrows more than the balance owed.

The costs have different names too. UK borrowers may face arrangement and valuation fees on the new loan, and an early repayment charge for leaving the current deal before it ends. US borrowers face closing costs, which can include points paid to lower the rate. Whatever they are called, add them together in the fees box, including any charge for leaving the current loan. The calculator models a rate-and-term change on the existing balance; it does not model a cash-out refinance.

Worked examples in pounds and dirhams

Pounds, remortgage. A £220,000 balance at 5.5% with 20 years left costs £1,513.35 a month. A new deal at 4.25% over the same 20 years, with a £2,000 fee paid upfront, costs £1,362.32, saving £151.04 a month. The simple break-even is 13.2 months; counting balances, the new loan is ahead from month 9 and £11,184 ahead after 5 years. Adding the fee to the loan and stretching to 25 years cuts the payment to £1,202.66, but the gain after 5 years falls to £9,639.

Dirhams. An AED 900,000 balance at 6% with 22 years left costs AED 6,147.67 a month. Refinancing at 4.75% over 25 years, with AED 15,000 of fees upfront, costs AED 5,131.06, a saving of AED 1,016.61. The simple break-even is 14.8 months, the fuller one month 17, and the new loan is AED 46,200 ahead after 6 years. The rates are illustrations; amounts are formatted in the currency you choose and never converted.

How does each input move the answer?

• New rate: the main lever. On the default loan with a 30-year reset, the break-even is month 47 at 6.75%, month 30 at 6.5%, month 22 at 6.25% and month 18 at 6%.
• Fees: with no fees, the default refinance is ahead from month 1 and $23,091 ahead after seven years; every extra dollar of fees pushes the break-even back.
• New term: a longer term lowers the payment but slows repayment, which the break-even counts. A shorter term raises the payment and can still break even, because the balance falls faster.
• Horizon: the years you expect to keep the loan. A refinance that breaks even in month 47 loses money if you move in year three.
• Balance: a larger balance makes the same rate cut worth more in money, so fixed fees are recovered sooner.

Common mistakes and what this calculator leaves out

• Comparing payments only. A lower payment from a longer term is not the same as paying less.
• Forgetting exit costs. A charge for leaving the current loan early is part of the cost; enter it with the fees.
• Ignoring the horizon. Break-even in month 47 is no help if you sell in month 36.
• Counting only the first year. Interest saved is largest early, while the balance is high.

Both loans are treated as fixed-rate for their whole terms and paid monthly in arrears, with interest charged at the annual rate over 12. It does not include taxes or tax relief on interest, mortgage insurance, the value of money over time, rate changes on variable loans or cash taken out. For the full schedule of either loan, use the amortization calculator.

Glossary

Refinance: replacing a loan with a new one, usually at a different rate or term; the US term. Remortgage: the UK term for the same thing. Product transfer: a UK move to a new rate with the same lender. Closing costs: US fees for arranging a new loan. Points: an upfront fee paid to lower the rate. Early repayment charge: a UK fee for leaving a deal before its end. Break-even month: the first month the new loan is ahead once fees and balances are counted. Term reset: starting a new full-length term instead of keeping the years left. Horizon: how long you expect to keep the new loan.

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