How Much Will I Save by Refinancing
How much you save by refinancing depends on how much your payment drops, what you pay to close, and how long you keep the loan. Monthly savings can be real while total interest goes up if you stretch the term. Compare both, and find your break-even point before you decide.
Key Takeaways
- Monthly savings = current principal and interest payment minus the new one.
- Break-even months = closing costs / monthly savings. You only come out ahead after that point.
- A shorter term usually saves total interest but raises the payment. A longer term does the opposite.
- The refinance break-even calculator lets you test your own figures.
How do I calculate refinance savings?
There are three numbers to compare, and each tells a different story.
- Monthly savings. Your old principal and interest payment minus your new one.
- Break-even. Closing costs divided by monthly savings.
- Total interest. The interest you will pay over the life of the loan, or over the period you plan to keep it.
Leave property taxes, insurance and HOA dues out of the comparison unless they change.
Does a lower payment mean lower total cost?
Not always. Total interest depends on the rate, the balance and the term. Here is the same $700,000 loan over its full term, using the same example rates:
| Scenario | Monthly P&I (approx.) | Total interest over full term (approx.) |
|---|---|---|
| 30 years at 7.0% | $4,657 | $976,562 |
| 30 years at 6.25% | $4,310 | $851,607 |
| 25 years at 6.25% | $4,618 | $685,306 |
The 25-year option has almost the same payment as today’s 7.0% loan ($4,618 vs. $4,657), but it cuts the interest from $976,562 to $685,306, a difference of $291,256 over the full term. The 30-year option at 6.25% saves $976,562 – $851,607 = $124,955 in interest if held to the end. The comparison is simplified: if you have already paid for several years, your remaining interest on the old loan is lower than the full-term figure.
What if I stretch the term to get a lower payment?
This is the most common way a refinance quietly costs more. If you have 22 years left on your loan and refinance into a new 30-year term, your payment falls partly because you are spreading the debt over 8 more years. You can offset this by paying extra principal each month or by choosing a shorter term. See rate-and-term refinance for term choices.
How does cash-out change the math?
With a cash-out refinance, your payment may rise even if the rate falls, because the balance is larger. Compare the cash you receive against the added interest and judge whether the use of that cash is worth it. Savings do not apply the same way.
What about dropping mortgage insurance?
If a refinance removes PMI or FHA mortgage insurance, add that monthly amount to your savings. PMI typically costs roughly 0.3% to 1.5% of the loan per year, depending on credit and down payment. Ask your loan officer whether you can remove PMI on your current loan instead, since that has no closing costs. See the PMI guide.
Savings are not guaranteed
Your real savings depend on the final rate, your credit, your loan amount, property type, points and the closing costs on your Loan Estimate. If you will sell, move or refinance again before break-even, you may not save. Savings figures here are examples, not promises.
Next steps
- Gather your current principal and interest payment, balance and remaining term.
- Get a written Loan Estimate with the proposed rate, payment and costs.
- Enter the numbers in the break-even calculator.
- Review the costs of refinancing and factoring in the costs.
- Decide based on break-even, total interest and your plans. The refinancing a home overview ties these together.
At Lendia, we show you the savings before you decide
At Lendia, we compare your current loan against real options, including shorter terms, and show the monthly, break-even and total-interest numbers. Contact us or get a rate quote now.
Frequently Asked Questions
How much can I save by refinancing?
It depends on your rate, balance, term and costs. The best way to answer is a side-by-side comparison with a written Loan Estimate.
Is a 1% rate drop enough to refinance?
It can be, but there is no rule. A smaller drop on a big loan may save more than a larger drop on a small one. Use break-even instead.
Should I include taxes and insurance when I compare payments?
Generally compare only principal and interest, unless the new loan changes your escrow or insurance.
Does refinancing save money if I move in five years?
Only if you reach break-even before then. In Example 1, break-even is about 40 months, so a 5-year stay would come out ahead.
Do I pay taxes on savings from refinancing?
Refinancing savings are not income, but the tax treatment of points and interest is a question for a tax professional.
Rates and terms depend on your situation; approval requires qualification.
Talk to a Licensed Lendia California Loan Officer
At Lendia, we review your situation and show you the programs you qualify for.