Refinancing creates a new loan
A refinance pays off an existing obligation and replaces it with new terms. The new amortization schedule starts from the refinanced principal, new rate, new term, and new closing date. It does not continue the old table.
Source: Federal Reserve
The payment can fall for different reasons
A payment may decrease because the rate is lower, the balance is lower, the new term is longer, or several factors changed. Extending the repayment horizon can reduce the monthly amount while increasing the number of interest-bearing periods.
Account for closing costs
Compare lender fees, third-party costs, points, and any amounts rolled into the new principal. Adding costs to the loan can make the new balance larger than the old payoff amount, which changes both payment and total interest.
Source: Federal Reserve
Compare from today forward
Do not add interest already paid to the decision as if it can be recovered. Compare the remaining scheduled cost of the current loan with the full prospective cost of the new loan, including upfront cash costs and how long you expect to keep it.
Stress-test the new term
Run the new loan at its contractual payment and also at a payment equal to the old amount if allowed. Review the break-even period for upfront costs, but treat it as one measure rather than a guarantee because plans and rates can change.
Source: Federal Reserve
Frequently asked questions
Does refinancing erase interest already paid?
No. Past payments remain past costs; refinancing changes the obligation from the payoff date forward.
Why can a lower rate still cost more overall?
A longer new term or financed closing costs can offset rate savings.
Does the new schedule start at payment one?
Yes. It is a new loan with its own payment count and allocation pattern.
What balances should I compare?
Compare the current payoff amount, the new amount financed, upfront costs, payment, term, and total prospective cost.
Source used
- Federal Reserve — A Consumer's Guide to Mortgage Refinancings