Introduction
To accurately calculate potential savings from mortgage refinance, you need to compare your current mortgage payments with the estimated payments of a new mortgage after factoring in closing costs and any prepayment penalties. This involves calculating the break-even point and analyzing the results. While refinancing can save you money in the long run, it comes with upfront fees. Ensure that the refinancing offers a tangible financial benefit to you and that you’ll stay in the home long enough to recoup the fees.
How to Work Out the Mortgage Refinance Savings Correctly?
Are you considering mortgage refinancing because mortgage rates have changed since you purchased your house? Refinancing might make sense, but the right way is to also factor in your break-even point and the time you have planned to stay in the house. Homeowners decide on mortgage refinance to get a cheaper loan, to lower their monthly payments, or to switch from an adjustable-rate mortgage to a fixed-rate loan. Whatever the reason is, calculating the mortgage refinance savings accurately is crucial to achieving your desired goals.
| Did you know? According to the latest reports, the average 30-year fixed mortgage rate is currently around 6.67% in July 2025, down from 6.77% the previous week. |
Here is a breakdown of the steps.
- Determine current mortgage details
- Original loan amount and interest rate: Calculate the total amount of your initial mortgage and the annual interest rate of your current mortgage.
- Original amortization: Factor in the original amortization or the loan term, eg, 30 years.
- Current monthly payment: Calculate your current monthly payment based on your original loan details.
- Number of payments made: The total number of payments you’ve made on your current mortgage.
- Determine new mortgage details
- New loan amount and new interest rate: The amount of your new refinanced mortgage. This could be the same as your current balance, or it could be a cash-out refinance. Also, determine the interest rate of the new mortgage you’re considering.
- New amortization: Factor in the term of the new mortgage, e.g., 15 or 20 years.
- New monthly payment: Calculate your estimated monthly payment for the new mortgage based on the new loan details.
- Closing costs: Estimate all the fees associated with the new loan, including the lender fees, third-party fees (appraisals, etc.), and any potential prepayment penalties, etc.
- Calculate monthly savings
- Monthly savings: Subtract the new monthly payment from your current monthly payment. If the new payment is higher, there are no savings.
| Reasons to refinance your home | |
| 1. | Lowering your monthly payment |
| 2. | Gaining more financial stability |
| 3. | Financing home renovations |
| 4. | To obtain cash |
| 5. | Changing or transferring ownership of the home |
- Calculate the break-even point
- Total refinancing costs: Add up all the closing costs and prepayment penalties. You can also use a mortgage refinance calculator to know the true amount of your savings.
- Break-even point (in months): A break-even point is the time it takes for savings to offset the costs of refinancing. Divide the total refinancing costs by the monthly savings. This will tell you how many months it will take to recoup the costs of refinancing through monthly savings.
| Fast fact Refinancing involves costs like appraisal fees and application fees, which need to be factored into the decision. |
- Analyze the results
- Consider your time horizon: If it is your desire to stay in your home for a long time, a longer break-even point might be acceptable. If you plan to move soon, a shorter break-even point is more important.
- Compare with your goals: refinancing can also be beneficial for reducing your monthly payment, shortening your loan term, or accessing cash from your home equity. Compare the savings with your goals to determine if refinancing is the right choice.
- Use a mortgage refinance calculator
Many websites offer free mortgage refinance calculators that can help streamline these calculations.
An example: imagine your current mortgage has a monthly payment of $2000, and you’re considering a refinance to reduce your monthly payment to $1800. Your closing costs are $5000.
Monthly savings: $2000 – $1800 = $200
Break-even point: $5000 / $200 = 25 months.
This means it would take you 25 months of saving $200 per month to recover the $5000 in closing costs. If you plan to stay in your home for more than 25 months, refinancing is a good option.
Conclusion
Comparing your current mortgage payments with the estimated payments of a new mortgage helps to accurately calculate the mortgage refinance savings. Understanding the concept of the breakeven point is essential to figuring out the amount of savings. You can also use the mortgage refinance savings calculators to determine how much you can potentially save every month by refinancing your mortgage.