Refinance Calculator

Why the usual break-even number flatters the deal

Nearly every refinance calculator gives you one figure: closing costs divided by the monthly payment reduction. On the default numbers above that says the deal pays for itself in about two and a half years, which sounds excellent.

The problem is that part of the "saving" is not a saving. If you have 26 years left and refinance into a fresh 30-year loan, your payment falls partly because the rate dropped and partly because you stretched the same debt over four extra years. The second half of that is borrowed comfort, not money earned — you are paying less each month because you are paying for longer. A break-even calculation that treats both halves as savings is measuring the wrong thing.

The headline figure at the top of this page compares something harder to fool: cash paid plus what you still owe at the point you expect to sell or refinance again. That single number captures the rate, the closing costs and the term reset all at once, and it is the honest answer to "am I better off?"

The gap between the two measures is not academic. On the defaults the usual headline says 24 months. Counting the balance you still owe — which is where the stretched term quietly hides — the refinance does not actually pull ahead until about year 3. Half again as long, on a deal that is genuinely worth doing. On a marginal deal the same correction can move the break-even past the point you expect to sell, which turns a yes into a no.

The lifetime interest number, and where it turns

Four extra years of payments is not free, and the rate cut has to be big enough to pay for them. On the defaults above — $285,000 at 7.25% with 26 years left, refinanced to 6.0% over a fresh 30 — the 1.25-point cut does cover it, saving about $19,000 of lifetime interest. But the margin is thinner than it looks. Hold everything else constant and the break-even sits at roughly 6.3%: a cut of about a full percentage point buys you nothing but the lower payment, and anything smaller means paying more total interest despite the better rate.

That is the number worth carrying away. On a mid-sized balance with a couple of decades left, resetting to 30 years costs you roughly a point of rate. Any refinance quoted at less than that is a cash-flow decision, not a saving, however it is presented. Move the new rate field a few notches above and you can watch the lifetime figure cross over.

Whether the lifetime number matters at all depends on your horizon. If you will sell in five years it is irrelevant and the lower payment is real cash in hand. If this is the house you retire in, it is the figure that counts. That is why the calculator asks how long you will keep the loan rather than assuming.

The option nobody offers you

You do not have to take a 30-year term. If you refinance into a term matching the years you have left, you capture the entire rate reduction with none of the stretch — your payment falls less, but your pay-off date does not move and the interest saving is unambiguous. On the defaults that is about $1,806 a month instead of $1,709, and it cuts lifetime interest to roughly $278,000 against $330,000 for the fresh 30-year loan — some $52,000 better, for $97 a month. Lenders quote 30-year terms by default because the payment sounds better, and because a longer loan is worth more to them. Ask for the shorter term explicitly; the rate is usually the same or better.

If the cash-flow relief is the point — and for freelancers with irregular income it often legitimately is — take the 30-year term, but understand what you are buying. The stretched term is a form of insurance against bad months, and it has a price, which the calculator shows you.

Closing costs, rolled or paid

Refinance closing costs run roughly 2% to 6% of the new loan: lender origination and underwriting, appraisal and credit, title and settlement, recording fees, plus prepaid interest and escrow. Rolling them into the loan avoids writing a cheque but means borrowing them at your mortgage rate for the full term — on $7,500 rolled into a 30-year loan at 6%, you will repay roughly twice that. A "no-cost" refinance is the same trade in a different wrapper: the lender covers the fees and charges you a higher rate, so it is worth doing only if you expect to move or refinance again quickly.

If you are self-employed

Refinancing means qualifying again from scratch, and the same rules that made the original mortgage hard still apply: two years of returns, income measured as Schedule C net profit rather than revenue, and a written explanation if the trend is down. A refinance application is a bad moment to discover your most recent year was your most aggressively expensed one. Our affordability calculator works through what a lender will actually count.

One more trap worth naming: a cash-out refinance to fund the business converts unsecured, dischargeable risk into a lien on your home. The rate is far lower than a business loan, which is exactly why it is tempting. But a business loan going bad costs you the business, while a mortgage going bad costs you the house. That is not a spread you can capture with arithmetic.

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