How this instrument works
A rate-and-term refinance replaces an existing mortgage with a new loan on the same property, at a new rate, over a term the borrower and lender agree on separately from whatever was left on the loan being paid off. That last part is what sets a mortgage refinance apart from a car refinance, where the remaining term is usually held fixed so a same-term rate swap isolates exactly what the rate change is worth. A mortgage lender will happily quote a fresh 15- or 30-year product no matter how many years remain on the current loan, so New loan term, years is a genuinely free variable here, not a fixed one.
The instrument runs the same amortizing-payment formula twice — once against Current interest rate, % and Remaining term on current loan, years, once against New interest rate, % and New loan term, years — against the identical Remaining loan balance, $, and reports the gap as Monthly savings, $. Because term is free to move, that saving can come from the rate falling, from the term stretching out, or from both at once, and the instrument does not separate the two: a borrower who resets from twenty-two years remaining back to a fresh thirty can see a smaller payment even when the rate barely improves, purely from spreading the same balance over more months.
Nothing here accounts for what a lender charges to originate the new loan — appraisal, origination points, title work and recording fees, typically 2% to 5% of the amount borrowed — and nothing here tallies total interest paid over the life of either loan. Monthly savings, $ is a payment comparison, not a verdict on whether the refinance pays for itself; that division belongs to this site's companion break-even instrument, which takes the closing costs and this figure's output and returns the number of months needed to recover them.
- Enter Remaining loan balance, $ from a recent mortgage statement — the amount still owed, not what was originally borrowed.
- Set Current interest rate, % and Remaining term on current loan, years to match the existing mortgage exactly.
- Enter New interest rate, % and New loan term, years from the refinance offer — the term can differ from what's left on the current loan.
- Compare Current monthly payment, $ against New monthly payment, $.
- Read Monthly savings, $ for the exact gap between the two, before any cost of arranging the swap.
Worked example — refinancing $300,000 from 7% to 5.5%
Take a Remaining loan balance, $ of $300,000, still carrying its original Current interest rate, % of 7% over Remaining term on current loan, years of 30. Running those three figures through the old-rate formula returns a Current monthly payment, $ of $1,995.91 — the payment such a loan would actually carry today.
A lender then quotes New interest rate, % of 5.5% on the same New loan term, years of 30. Recomputing at the new rate returns a New monthly payment, $ of $1,703.37, which puts Monthly savings, $ at $292.54 every month — before weighing in whatever the lender charges to originate the new loan, which is exactly what this site's companion break-even instrument works out separately.
Questions
Why does the calculator let the new loan term differ from the old one?
Because a mortgage refinance is not bound to match the term of the loan it replaces, unlike a same-term car-refinance swap. Setting New loan term, years higher than Remaining term on current loan, years spreads the same balance over more payments, which shrinks New monthly payment, $ and inflates Monthly savings, $ even when New interest rate, % barely improves — an extra saving that comes with more months of interest this sheet does not total.
Does Monthly savings, $ already include what the refinance costs to arrange?
No. It compares only the two payments and excludes appraisal fees, origination points, title charges and recording fees, which on a typical mortgage refinance run 2% to 5% of the amount borrowed. Divide those costs by Monthly savings, $ to see how many months it takes to recover them, or run this site's companion Refinance Break-Even Calculator, which performs exactly that division.
Who actually runs this calculation?
Most often a homeowner who has watched published mortgage rates fall well below the rate on their existing loan, or whose credit improved enough since the original purchase to qualify for a materially better one. Lenders and mortgage brokers run the identical arithmetic when pitching a refinance offer, so the payment figures here should land within cents of any quote for the same balance, rate and term.
Why is Current monthly payment, $ different from what my mortgage statement shows?
Small differences are normal. A real statement folds in escrowed property tax and homeowner's insurance; this formula computes principal and interest only. Enter Remaining loan balance, $ exactly as a payoff statement from the loan servicer shows it, and the gap should be limited to those escrow items plus whatever rounding the servicer applies.
Can refinancing to a shorter term produce a small or negative Monthly savings, $ figure and still be worth it?
Yes — this instrument measures the payment gap only, not lifetime interest. Moving New loan term, years from 30 down to 15 often shrinks Monthly savings, $ or pushes it negative because the same balance is repaid faster, yet total interest paid over the life of the loan can still fall sharply. That trade lives outside what Monthly savings, $ reports here.
What does a negative Monthly savings, $ figure mean?
It means the new arrangement costs more each month than the current one — usually because New interest rate, % did not fall enough to offset a shorter New loan term, years, or because the offered rate is actually higher. That is not automatically a bad refinance, but it means the case for doing it has to rest on something other than an easier monthly payment.
References
- Consumer Financial Protection Bureau — Owning a Home
- Federal Reserve — Consumer's guide to mortgage settlement costs
Read this first: This instrument shows arithmetic, not advice. Real offers add fees, taxes and terms that vary by lender and place — verify the figures against your actual paperwork before deciding anything.