When rates drop, refinancing your mortgage to a lower one looks like free money: same loan, smaller payment. But a refinance isn’t free — it comes with closing costs, and those costs decide whether the lower rate actually helps. The real question isn’t “is the new rate lower?” It’s “do I stay long enough for the savings to pay back the costs?” This tool answers that.
How it works
It works out two payments on the balance you still owe: one at your current rate, one at the new rate, both over the months you have left. The difference is your monthly savings. Multiply that across the remaining term and subtract the closing costs, and you get the total savings — what refinancing is really worth.
Then the number that matters most: the break-even point — closing costs ÷ monthly savings, the month when the savings have repaid the costs and you start coming out ahead. As the Federal Reserve’s refinancing guide frames it, the whole decision turns on whether you’ll keep the home long enough to reach that point.
An example
Take the values already filled in: a $250,000 balance, currently at 6.8% with 300 months (25 years) left, refinanced to 5.8%, with $5,000 in closing costs. The payment drops from about $1,735 to $1,580 — roughly $155 a month. Over the full remaining term that’s about $41,500 saved after the costs, and you break even in about 33 months. So if you’ll stay put for three years or more, it pays; if you might move in two, the $5,000 isn’t worth it. Push the new rate closer to the old one and watch the savings shrink while the break-even stretches out — that’s the test a small rate cut has to pass.
The part that matters
A lower rate is necessary but not sufficient — the costs and your time horizon decide it. Three honest things:
- Break-even beats payment size. A bigger monthly saving that takes five years to recoup can be worth less than a smaller one that pays back in one, if you’re likely to move. Look at the break-even against your real plans for the home.
- This isolates the rate; a real refi may reset the term. The tool compares both loans over the same remaining months. Lenders usually offer a fresh 15- or 30-year term, which drops the payment more — but spreading the balance over more years can increase total interest even at a lower rate. Read the monthly saving here as the rate effect alone.
- “No-closing-cost” isn’t free. The CFPB notes those offers just fold the cost into a higher rate or a larger balance. Enter the closing costs honestly — if they’re truly zero, the savings start immediately, but check whether the rate you were quoted quietly went up to pay for it.
Change the values above to match your own loan and a real quote, and let the break-even — not the rate alone — make the call. To see the full payment and total interest on either loan, use the mortgage payment calculator.