Mortgages
How to Calculate Whether a Refinance Is Worth It
Compare the remaining cost of your current loan against the total cost of the new one, including closing costs and the reset term.
By Michael Bennett · Reviewed by Legamoney Mortgage & Lending Desk
A lower rate on a longer term can cost more overall. Compare remaining total cost, not headline rates.
Key takeaways
- A lower rate on a longer term can cost more overall. Compare remaining total cost, not headline rates.
- Reference example used throughout: $300,000 at 6.5% over 30 years — $1,896.20 a month.
- Every step below can be reproduced with a basic scientific calculator.
- Escrowed taxes and insurance are always calculated separately from principal and interest.
In this guide
- The method
- Point by point
- Total the remaining payments on the current loan
- Price the new loan over its full term
- Add refinance closing costs to the new total
- Compare the two totals
- Also compute the monthly break-even in case you move early
- A short review checklist
- Questions worth asking
- Worked example
- Where people go wrong
- Check your answer
The method
- Total the remaining payments on the current loan.
- Price the new loan over its full term.
- Add refinance closing costs to the new total.
- Compare the two totals.
- Also compute the monthly break-even in case you move early.
Point by point
Total the remaining payments on the current loan
Total the remaining payments on the current loan. This is the part most people skip, and it is where mortgage payment calculations costs money quietly rather than obviously.
Price the new loan over its full term
Price the new loan over its full term. Write the answer down before you act on it — an undocumented assumption here is impossible to audit later.
Add refinance closing costs to the new total
Add refinance closing costs to the new total. Check this against your own paperwork rather than a general guide, because the terms differ between providers.
Compare the two totals
Compare the two totals. If this changes, everything downstream of it changes too, so review it whenever your circumstances move.
Also compute the monthly break-even in case you move early
Also compute the monthly break-even in case you move early. Ask for this in writing. A verbal answer on mortgage payment calculations is not something you can rely on if it is later disputed.
A short review checklist
- Confirm which of the points above actually applies to your situation — several will not.
- Gather the documents that prove each figure you are relying on.
- Model the outcome with your own numbers before accepting anyone else's summary.
- Note the date you checked, because rules and rates on mortgage payment calculations change.
- Keep a copy of any written confirmation you receive.
Questions worth asking
- How does this apply to you: total the remaining payments on the current loan?
- How does this apply to you: price the new loan over its full term?
- How does this apply to you: add refinance closing costs to the new total?
- How does this apply to you: compare the two totals?
- How does this apply to you: also compute the monthly break-even in case you move early?
Treat the list above as the agenda for a single sitting. Working through 5 specific questions with your own paperwork in front of you settles more about mortgage payment calculations than reading another general explanation, and it produces a written record you can revisit when something changes.
Worked example
First four payments on the reference loan
| Payment | Amount | Interest | Principal | Balance |
|---|---|---|---|---|
| 1 | $1,896.20 | $1,625.00 | $271.20 | $299,728.80 |
| 2 | $1,896.20 | $1,623.53 | $272.67 | $299,456.12 |
| 3 | $1,896.20 | $1,622.05 | $274.15 | $299,181.97 |
| 4 | $1,896.20 | $1,620.57 | $275.64 | $298,906.34 |
Where people go wrong
- Using the purchase price rather than the amount actually financed.
- Using the APR in place of the note rate, which overstates the payment.
- Rounding the monthly rate too early — keep six decimal places.
- Treating escrow as part of the loan calculation instead of a separate monthly deposit.
Check your answer
Build one month of the schedule. Interest is the balance multiplied by the monthly rate; the principal portion is whatever is left of the payment. If the closing balance matches a lender's schedule, your inputs are right.
Sources
- 01Consumer Financial Protection Bureau — Understanding loan options
Official explanation of fixed-rate amortisation and loan structures.
- 02Freddie Mac Primary Mortgage Market Survey
Weekly published average mortgage rates used to sanity-check rate scenarios.
Frequently asked questions
Do I need a financial calculator?
No. Any calculator with an exponent key handles the (1 + r)^−n term; a spreadsheet does it with the PMT function.
Why does my lender's quote differ slightly?
Usually because the quote includes escrow or mortgage insurance, or because the loan amount includes financed fees.
Does this work for personal and auto loans?
Yes — the same amortisation formula prices any fixed-rate instalment loan.
Editorial transparency
- Written by
- Michael Bennett — Mortgage writer — home financing, refinancing and interest rates
- Reviewed by
- Legamoney Mortgage & Lending Desk — Editorial desk — mortgages, home equity, and consumer credit
- How this was researched
- Worked with the standard published formula for this calculation and checked against the primary sources listed below.
- Corrections
- Spotted an error? Tell us and we will correct and re-date the page. See our editorial policy.
- Advertising disclosure
- Ad placements are clearly labelled and never influence editorial judgement or the ordering of comparisons.
About the author
Michael Bennett writes Legamoney's mortgage coverage: payment and amortisation maths, refinancing decisions, preapproval and underwriting, home equity and reverse mortgages. He works from HUD programme handbooks, CFPB rules under TILA and Regulation Z, and the FHFA conforming loan limits, and links to the weekly Freddie Mac survey rather than quoting a fixed rate. He works with the Legamoney Mortgage & Lending Desk.
How this article was checked
- Every factual claim is traced to a named regulator, government agency, or the provider's own published terms before publication.
- Figures that change — rates, limits, thresholds — link to the primary source that publishes them rather than being quoted as a fixed number.
- Worked examples are shown as full arithmetic so a reader can reproduce the result independently.
- Each guide is checked by the owning editorial desk before it is published, and again whenever the underlying rules change.
Covers: Mortgage payment and amortisation maths · Refinancing, break-even and closing costs · Preapproval, underwriting and affordability · Home equity, HELOCs and reverse mortgages
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Disclaimer
Figures on this page are worked examples produced with standard formulas and the assumptions stated. They are not an offer, a quote, or personalised financial advice. Consult a qualified professional before acting on any information here. Read our full disclaimer.