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Homeowners who have been thinking about refinancing, or who should have been, should get a move on. Interest rates are climbing and seem likely to keep going up.

The basics of any refinancing decision are pretty simple. If you’ll have the new loan long enough for its lower payment to offset the refinancing costs, the move generally pays.

But interest rates, investment returns, inflation and other considerations change pretty often. So let’s see how refinancing looks today, using the BankingMyWay Refinance Breakeven Calculator. In fact, a borrower who can achieve only a small interest-rate reduction may do better by prepaying principal on the old loan rather than sinking cash into closing costs for a new one.

If you got a 30-year fixed-rate mortgage 10 years ago you may be paying more than 8%, and refinancing at today’s rates, typically a little more than 5%, could save you a bundle.

Or could it? After all, you have 10 years of payments behind you. Refinancing to a new 30-year loan would mean 30 more years of payments instead of 20, offsetting savings from the lower rate.

Let’s assume we're dealing with a 30-year loan for $200,000, with 20 years to go and an interest rate of 8.3%. And we’ll figure on a new 30-year loan at 5.3%. The new loan is for $176,515, the balance remaining on the old loan after 10 years of payments.

With the chart selection on “Monthly Payment Breakdown,” the calculator says the new payment would be $1,054, compared to $1,593 on the old loan. The “Breakeven points” chart says it would take about nine months for the monthly savings to offset $4,330 in closing costs.

But the more relevant figure is on the yellow bar, showing a 14-month breakeven point. This accounts for the fact that the new loan’s lower interest rate would reduce the mortgage-interest deduction on your federal income tax return. So your monthly savings would be a little smaller than it first appeared, and breaking even would take six months longer. Still, the refinancing looks like a pretty good deal.

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Also click the “View Report” button, and then scan down for the line showing total interest remaining. Here you see the effect of adding 10 years of payments with the new loan. In this case, the refinancing pays off. You’d pay another $186,000 in interest if you kept the old loan for 20 more years, but only $176,000 over 30 years with the new loan.

Of course, if you had taken out an 8.3% loan 10 years ago you would have had plenty of opportunities to refinance it before now. What if you had taken out a 30-year loan just three years ago at a rate of only 6.3%? Would it make sense to refinance now if you would only cut your rate by one percentage point?

It could, but since you’d save only about $169 a month it would take longer, 39 months, to break even.

Also, the calculator’s default assumes pretty modest closing costs. If they were twice as high, which is entirely possible, it would take twice as long to break even, about 6 ½ years.

If you face fairly large closing costs, perhaps because you’d pay three points, or upfront interest charges, instead of one, or none, be sure to look at the fourth bar in the refinance breakeven chart.

This light blue bar also takes into account what would happen if you took all that closing-cost money and used it for an extra principal payment on the old mortgage instead of spending it on a new loan. The prepayments make the old loan more economical. As a result, the new one would take longer to reach the breakeven point.

In the example cutting the mortgage rate from 6.3% to 5.3%, the breakeven point goes from 39 months to 70 months when the prepayment option is counted. And if you paid two points instead of one, increasing closing costs by about $1,900, the breakeven point grows to 138 months — 11 ½ years.

Bottom line: Refinancing pays off quickly if there is a substantial reduction in interest rate. If the amount saved is minor, you may do better using your cash to pay down the old loan.

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