Guide
Refinancing a loan: break-even months, total savings and the trap of a longer term
A lower rate looks like a bargain, but moving a loan costs money, and it can change the length of the loan. The right test is not whether the new rate is lower, but whether the total you will pay falls once all the costs are included, and how soon. This calculator compares the loan you have with the one you are offered and gives three answers: the monthly saving, the month in which the saving repays the cost, and the saving over the whole remaining life.
What goes in
Enter the balance you still owe, your current rate and the months remaining. Then enter the new rate and the new term in months, and the cost of refinancing. A switch decides whether you pay the cost in cash or add it to the new loan. The current payment is not typed in; it is calculated from the balance, rate and months, using the same reducing-balance formula as a lender.
A worked example
The default is a 35,00,000 balance at 9.25% with 216 months left, refinanced at 8.4% for the same 216 months with a cost of 35,000. The payment falls from 33,324.17 to 31,476.15, a saving of 1,848.01 a month. The cost is recovered in 18.9 months, about 1 year 7 months. The remaining payments on the current loan total 71,98,020 and the total after refinancing, with the cost, is 68,33,849, a lifetime saving of 3,64,171. The page confirms that you would pay less overall.
Break-even and lifetime saving
Break-even tells you how long you must keep the new loan for the move to pay for itself. If you may sell the house or repay in a few years, a long break-even is a warning. The lifetime saving is the stricter test because it counts everything to the end of both loans. Where they disagree, for instance a quick break-even but little total saving, look at the term: the saving may come from stretching the loan.
The trap of a longer term
The second sample moves the same loan to 7.9% over 300 months with a cost of 60,000 added to the loan. The payment drops by 6,082.92 to 27,241.24, which looks attractive, but the total payments rise to 81,72,373, so the lifetime saving is negative at about −9,74,353. The page shows the payment for the new rate over the old 216 months, 30,933.69, and warns that the new loan runs 84 months longer. The lower payment came from the longer term, not from the lower rate.
Edge cases
A rate that is higher than your current one gives a negative saving, and the break-even is shown as never. If you roll the cost into the loan, there is no up-front cost to recover. Terms up to 600 months are accepted. If the new term is shorter than the remaining one, the payment may rise even though the rate is lower, and the page still compares total payments.
Limits
Taxes and tax benefits on loan interest are not included, nor are changes in a floating rate or insurance bundled with the loan. Prepayment penalties on the old loan belong in the cost field. The comparison assumes that you keep the new loan to its end.
Related tools
- Mortgage Calculator shows the full payment schedule of the loan you are moving into.
- Loan Prepayment Calculator offers an alternative: paying the old loan down faster.
- Loan Calculator gives the payment for any amount, rate and term.
- Rent vs Buy Calculator looks at whether to own the home at all.
Checked against the current version of the Refinance Calculator on .