The inputs that control the result
Required input: Count every cost of replacing the loan
Downside case: Compare balances on the same future date
Decision threshold: Stress-test the holding period
Define the inputs: Build a complete replacement cost
Include lender charges, points, appraisal, title work, recording and any other closing expense. If costs are added to the balance, they remain costs even though no check is written. Exclude escrow refunds from savings: they return money already yours, while a new escrow deposit may temporarily increase cash needed at closing.
Run the numbers: Compare more than the monthly payment
A new thirty-year loan can lower the payment partly by extending repayment. On a selected future date, compare the remaining balance, cumulative interest, upfront cost and cash-flow difference under both loans. Decide whether monthly relief, faster payoff or total cost is the main job. One refinance rarely maximizes all three.
Test the result: Use three holding periods
Calculate a short, likely and long case before treating the break-even month as certain. A sale, another refinance or extra principal payments can shorten the period that generates savings. Also test whether the refinance still works if closing costs rise or the final rate is less favorable than the first quote.
Inputs and assumptions to write down
- What is the total cost whether paid or financed?
- What are both loan balances on the comparison date?
- Does the new term extend the payoff date?
- Which event would end the savings early?
Keep the math reproducible
Save the current statement, new Loan Estimates and a same-date comparison of cost, payment and balance. Write the purpose of refinancing and the minimum holding period that supports it. Recalculate if the final disclosure changes the rate, cash to close or financed balance.
Primary source: CFPB mortgage and refinance resources.
Measure the loan you will actually keep
Subtract lender credits from refinance costs only as shown in the quote, then divide net cost by the monthly payment saving for a simple break-even. Next, compare principal balances at the expected exit date. Restarting a long term can lower the payment while slowing principal reduction, so payment savings alone can overstate value.
Illustrative two-horizon test
Suppose net refinance costs are $3,600 and the payment falls by $120. The simple break-even is 30 months. If the household may move in two years, the costs are not recovered on that measure. If it expects to keep the loan for six years, compare total payments, remaining balances and the cash used at closing through month 72.
- Use the payoff statement, not the last statement balance.
- Keep taxes, insurance and cash-out proceeds separate from rate savings.
- Test a no-cost or lender-credit quote beside the lower-rate quote.
- Do not assume a future refinance will be available.
Reuse the verified inputs: Keep the same amounts, dates and downside assumptions when you open the connected guides. Use the same loan amount, holding period and cash assumptions when moving from the extra-payment decision to HELOC and home-equity loan tradeoffs; otherwise two apparently different choices may only reflect different inputs. See the mortgage structure and repayment guides for the complete sequence.
Keep the calculation reproducible
Write down the inputs, source dates and threshold so the result can be checked later.
Use the result as a threshold
A refinance is not justified by a lower rate alone. Compare all new loan costs with interest and payment changes over the period you expect to keep the replacement loan, while tracking whether the new term delays principal repayment.
Build your mortgage comparison brief →This guide provides general education. Examples are illustrative, not market quotes. Verify current product terms and obtain individualized advice when needed.