How do I calculate the prepay break-even on a CRE refinance?

Worked example and what to model

Worked example: $20M outstanding loan at 6.5%, 4 years remaining, with a yield-maintenance penalty estimated at $1.4M. New loan at 5.75%, 30-year amortization, $200K of refi closing costs. Annual rate savings = 75 bps × $20M = $150K. Total cost to refi = $1.4M + $200K = $1.6M. Months to break-even = $1.6M / $150K × 12 = 128 months (10.7 years).

Conclusion: do not refi unless the expected hold from refi date is materially longer than 10.7 years. The rate savings do not pay back the prepay penalty within reasonable hold horizons; better to ride the loan to its open window.

Sensitivity: model break-even at multiple rate-savings scenarios (50 bps, 75 bps, 100 bps, 150 bps), at multiple prepay-penalty scenarios (current Treasury yields up 25 bps, down 25 bps, current), and at multiple closing-cost scenarios.

What to include in costs: prepay penalty (defeasance, yield maintenance, step-down, or whatever the loan documents specify), refi closing costs (origination, third-party reports, lender legal, title and survey, lender legal cap, transfer taxes), incremental reserve funding required by the new loan (working-capital impact).

What to include in benefits: annual rate savings, IO term differential (annual cash-flow improvement from extending IO), proceeds increase if cash-out is part of the refi (recovered equity), structural improvements (recourse removal, MAC tightening, prepay flexibility).

When refi makes sense even at long break-even: when the borrower needs liquidity from cash-out, when the existing loan structure (recourse, covenants) is operationally costly, when the existing lender is impaired (workout, special servicer), or when refinancing into a lower-leverage structure improves the property's financial flexibility.