Mortgage Refinance Worked Example

The decision

The borrower started with a $590,000, 30-year fixed mortgage at 3.75%. Nearly seven years later, a lender offers a 15-year refinance at 2.8% with $6,000 paid upfront. The refinance rate is lower and the term is shorter, but its monthly payment is higher. The useful question is not how much interest has already been paid. It is whether the new future cashflow in Table 2 is preferable to the remaining cashflow in Table 1.

Step 1: enter the original loan

• Original loan amount: $590,000
• Original interest rate: 3.75%
• Original term: 30 years
• Original start date: February 1, 2015
• Refinance decision date: January 1, 2022
• Scheduled payment override: empty

Leaving the override empty uses the standard fixed-rate payment formula. The resulting scheduled principal-and-interest payment is $2,732.38 per month. A payment due on the decision date is included, so this date range contains exactly 83 scheduled payments.

Step 2: build Table 1 — the original loan

• June 1, 2020: $5,000
• March 1, 2021: $7,500

For each month, interest is calculated from the prior balance first. Scheduled principal is then applied, followed by that month's extra principal. The $12,500 in extra payments therefore lowers the balance immediately and also reduces interest in later months.

In Table 1, the 83rd payment is the refinance decision point. That highlighted row shows:

• Principal paid: $97,099.32
• Interest paid: $142,188.39
• Remaining balance: $492,900.68

The principal total includes both scheduled and extra principal. Each monthly row can be checked by adding scheduled principal and extra principal, then subtracting both from the prior balance.

Continue Table 1 through the original loan payoff

After the highlighted decision row, Table 1 continues without restarting. It keeps the original 3.75% rate and $2,732.38 scheduled payment. With no future extra payments, the rest of Table 1 produces:

• Future interest: $233,502.58
• Remaining payments: 266
• Projected payoff date: March 1, 2044

The remaining count is shorter than the original 277 months that would remain after 83 payments because the irregular extra principal accelerated payoff.

Step 3: build Table 2 — the refinanced loan

• New interest rate: 2.8%
• New term: 15 years
• Financed closing costs: $0
• Upfront closing costs: $6,000
• Lender credits: $0
• Cash out: $0
• Refinance start date: January 1, 2022

New principal equals the old payoff balance plus financed closing costs and cash out, minus lender credits. Here, new principal remains $492,900.68. The 15-year refinance produces:

• New monthly payment: $3,356.67
• Future interest: $111,300.03
• Payoff date: January 1, 2037

Step 4: compare Table 1 with Table 2

From the decision point onward, Table 2 reduces projected future interest by $122,202.55, but raises the scheduled monthly payment by $624.29. That is a term tradeoff, not a contradiction: much more principal is paid each month, so the balance disappears more than seven years earlier.

The $142,188.39 of interest through the highlighted row in Table 1 is displayed only to explain the loan's history. It is a sunk cost. Adding it to either future path would distort the refinance decision because neither choice can recover it.

How to read the two charts

Both charts use months after the original loan start. For this 30-year example, the chart horizon extends from month 0 through month 360. In the balance chart, the Table 1 line starts at $590,000 in month 0 and reaches payoff in month 349 because the irregular extra payments shortened the loan. The Table 2 line begins at the refinance point, month 83, with a balance of $492,900.68 and reaches payoff in month 263.

In the cumulative-interest chart, Table 1 grows from $0 to $375,690.97 of lifetime interest. The Table 2 path begins at month 83 with the $142,188.39 of original-loan interest already paid. The refinanced loan alone adds $111,300.03, so the orange line ends at a combined original-plus-refinance interest total of $253,488.42. The shared $600,000 vertical scale makes those interest totals visually comparable with the original balance.

These lifetime totals provide context. The refinance decision still compares only interest incurred after the decision point, which is why the projected future interest savings remain $122,202.55.

Closing-cost break-even

This is when cumulative interest savings from refinancing recover the upfront closing costs. For each month after the refinance starts, the calculator subtracts Table 2's cumulative interest from Table 1's cumulative interest and compares the savings with the $6,000 upfront cost.

In this example, cumulative interest savings recover the upfront cost in month 15, April 1, 2023. If upfront closing costs are zero, the calculator reports that recovery is immediate.

How to check both tables

1. Start each row with the prior row's ending balance.
2. Multiply that balance by 3.75% ÷ 12 in Table 1, or 2.8% ÷ 12 in Table 2, to get monthly interest.
3. Subtract interest from the scheduled payment to get scheduled principal.
4. Subtract scheduled principal and any extra principal from the prior balance to get the new ending balance.
5. In the final row, confirm that payment components are reduced as needed and the ending balance is exactly $0.00.

What this comparison does not include

This Phase 1 comparison handles one original loan and one refinance offer. It does not rank multiple offers, calculate NPV or IRR, model taxes or escrow, predict home value, or discount future cashflows. Those omissions keep the month-by-month loan mechanics transparent.