How to calculate if refinancing is really worth it

The bank promises a lower installment and better terms. Sounds great, but will you really save? Refinancing comes with costs that can eat up potential savings. Simple math will help you make a wise decision instead of following advertising promises.

1. Gather data about your current loan

Before you start calculating, you must know all the details of your current obligation. How much remains to repay, what’s the interest rate, how many installments are left, is there a fee for early repayment. You’ll find this information in your loan agreement or on your online banking platform.

Simple rule: Write all numbers in one place. Comparing in your head doesn’t work with complicated calculations.

2. Calculate the total cost of remaining repayment

Multiply the remaining number of installments by the installment amount. If you have 60 installments of 1,500 PLN, the total cost is 90,000 PLN. This is your reference point. Every alternative must be compared to this number.

Kate had a mortgage with 180 remaining installments of 2,200 PLN. The total cost of remaining repayment was 396,000 PLN. This was her base for comparisons.

3. Include the early repayment cost

Many loans have an early repayment fee. It can be several percent of remaining principal. If you have 200,000 PLN left to repay and the fee is 2 percent, you’ll pay 4,000 PLN just for the possibility of refinancing.

Key information: Check your loan agreement. After three years from signing, the early repayment fee for mortgages is legally limited.

4. Calculate the total cost of the new loan

Take the refinancing offer and calculate all costs. Commission for granting the new loan, property valuation costs for mortgages, notary fees, insurance. Add this to the sum of all installments of the new loan.

Tom received a refinancing offer with an installment of 1,900 PLN for 180 months. The sum of installments was 342,000 PLN. Plus 6,000 PLN commission, 1,000 PLN valuation, and 8,000 PLN insurance. The total cost of the new loan was 357,000 PLN.

5. Compare both options

Now you have two numbers to compare. The total cost of remaining repayment of the current loan minus the total cost of the new loan including all fees. If the difference is positive, refinancing pays off. If negative, stay with the current loan. Savings = Current loan cost - New loan cost - Transfer costs

Behavioral trick: Don’t just look at the installment difference. A lower installment with a longer period can mean higher total cost.

6. Consider the time value of money

Advanced analysis accounts for the fact that money today is worth more than money in 10 years. If refinancing lets you save 200 PLN monthly, you can invest that money. But for most people, a simpler comparison of total costs is sufficient.

7. Consider scenarios

What if interest rates rise? What if you lose your job? What if you want to overpay the loan? Refinancing changes your obligation for years. Think about different scenarios and check how the new loan behaves in each of them.

Anna refinanced a loan with variable interest to a fixed rate. The installment increased by 100 PLN, but she gained certainty that a sudden interest rate increase wouldn’t surprise her.

8. When refinancing definitely doesn’t pay off

There are situations when refinancing is a bad idea regardless of calculations.

• You have few installments left transfer costs won’t have time to pay off
• Your credit history has worsened you’ll get worse terms
• The new loan requires expensive insurance hidden cost eats up savings
• You significantly extend the repayment period lower installment but higher total cost

Peter had 24 installments until the end of his loan. Refinancing would give him a lower installment, but transfer costs were 3,000 PLN. With two years of repayment, that amount had no chance of paying off.

Shift in perspective: Refinancing is a financial decision, not an emotional one. Calculate carefully, compare options, and don’t be fooled by advertisements. Your money, your responsibility.

The math of refinancing is simple but requires patience. Spend an hour on exact calculations and you’ll avoid years of regretting a hasty decision.