Calculation 1: Monthly Payment Difference
Monthly payment uses the standard mortgage amortization formula. The calculator handles this automatically. What to understand: the difference in payment is not just the rate difference times the balance. It also depends on the remaining term and any change in loan term.
If you have 22 years remaining on your current loan and refinance to a new 30-year, you’re comparing an 22-year payment to a 30-year payment. The longer term reduces payment more than the rate alone. This makes the monthly savings look better than the actual financial outcome.
Calculation 2: Break-Even Period
Break-Even = Total Closing Costs ÷ Monthly Savings. Simple but easily miscalculated. The two common errors: (1) using the wrong monthly savings figure (comparing a 30-year payment to a 22-year remaining payment makes savings look artificially large); (2) excluding all closing costs (some roll into the loan and feel invisible).
Common break-even calculation errors and corrections
| Error | Effect on Break-Even | Correct Approach |
|---|---|---|
| Comparing new 30-yr to current 22-yr payment | Makes savings look 30% higher than reality | Compare new 30-yr to current 22-yr on remaining balance |
| Ignoring rolled-in closing costs | Understates closing costs | Include in loan balance for total cost calculation |
| Excluding prepaid items | Underestimates total cost | Include property tax/insurance escrow in total |
| Using pre-tax mortgage interest | Overstates savings for itemizers | Adjust for tax deductibility if relevant |
Calculation 3: Lifetime Interest Savings
Lifetime savings = total interest on current loan (remaining payments at current rate) minus total interest on new loan. This number is always presented assuming you keep the loan to maturity — which most homeowners don’t. Adjust by your expected timeline in the home.
Calculation 4: Total Cost Including Closing Costs
Net lifetime savings = lifetime interest savings − closing costs. If your lifetime savings is $80,000 but you’re adding $12,000 in closing costs (some rolled into the loan balance), true savings is $68,000. And if you stay only 10 of 30 years, savings are proportional: 10/30 × $80,000 = $26,667 minus $12,000 closing costs = $14,667 net.
Run All Four Calculations
The calculator computes break-even, monthly savings, lifetime savings, and total cost simultaneously.