How to use
Use this worksheet to run two related decisions sponsors face on every existing-loan refi: (1) the prepay break-even, at what hold horizon does the new-loan rate savings exceed the prepay premium plus refi costs, and (2) the refi-vs-hold determination, whether the break-even comfortably fits inside the planned hold horizon, or whether holding the existing loan to the open prepay window or to maturity is the better economic outcome. This is not a substitute for running the math with your advisor and accountant.
Inputs
Gather these inputs before running the calculation. Use lender quotes for new-loan terms; pull defeasance estimates from your lender's servicer near the actual contemplated payoff date.
- Existing loan: balance, rate, remaining term, prepay structure, current prepay premium estimate.
- New loan: indicative rate, term, fees (origination, title, legal, appraisal, environmental), reserves required.
- Sponsor's pre-tax discount rate for present-value calculation.
- Anticipated hold period through new-loan term.
Step 1. Quantify the cost to refinance
Total cost = current prepay premium + new-loan origination + new-loan third-party costs + new-loan reserves (over and above what's released from old reserves).
- Prepay premium on existing loan.
- Origination fee on new loan.
- Title insurance and recording.
- Lender legal and borrower legal.
- Appraisal, Phase I environmental, property condition report.
- Net change in upfront reserves (new − released).
Step 2. Quantify the rate savings
Annual savings = (existing rate − new rate) × new-loan balance. This is a pre-tax cash-flow improvement starting day 1 of the new loan.
- Annual debt-service difference (existing − new).
- Multiplied across the new loan's term.
- Present-valued at sponsor's discount rate.
Step 3. Calculate the break-even
Break-even is the year (or month) at which cumulative present-valued rate savings equal the total refinance cost. If break-even is shorter than your remaining hold, the refi is accretive.
Break-even logic
| Inputs | Math | Decision |
|---|---|---|
| Total cost = $850K | PV of annual savings $200K @ 8% | Break-even = ~5 years |
| Hold remaining = 7 years | Savings PV at year 7 = $1,041K | Refi accretive: $191K NPV |
| Hold remaining = 4 years | Savings PV at year 4 = $662K | Refi dilutive: −$188K NPV |
Step 4. Stress the assumptions
Re-run with worst-case inputs. The refinance decision should hold even if prepay premium is 20% higher than indicative, the new rate is 25 bps wider, or the hold is 12 months shorter.
- Stress prepay premium +20%.
- Stress new-loan rate +25 bps.
- Stress hold period −12 months.
- Identify the most-sensitive variable.
Step 5. Consider non-cash factors
The break-even calculation captures cash math but not structural improvements. A new loan with a tighter MAC, longer IO, or non-recourse status can be worth meaningful additional value beyond the rate savings.
- Cash-out proceeds (if any) at the refi.
- IO period extension on new loan.
- Recourse improvement (partial → non-recourse).
- Extension options or assumability improvements.
Step 6. Run the refi-vs-hold decision
The refi-vs-hold decision builds on the break-even output. Refinance only when the break-even comfortably fits inside the planned hold horizon and the alternative, holding the existing loan to the open prepay window or to maturity, is materially worse on a risk-adjusted basis.
Compare three outcomes on the same NPV basis: (A) refi today at indicative new-loan terms, (B) hold the existing loan to the open prepay window then refi at projected forward rates, (C) hold the existing loan to maturity then refi at projected forward rates. Each path has different rate exposure, prepay cost, and execution risk; the right answer requires the full comparison.
- Path A wins when break-even fits comfortably and rates have signaled a stable-to-rising path.
- Path B wins when the open prepay window is near and the existing rate is roughly competitive.
- Path C wins when the loan is already approaching maturity and a sale is a credible alternative.
- Re-run the comparison every 60 to 90 days as the rate environment moves.
Refi-vs-hold decision matrix
| Path | When it wins | Key risk |
|---|---|---|
| A. Refi today | Break-even ≤ 60% of remaining hold; rates expected stable or higher | Locking today removes downside if rates fall further |
| B. Hold to open window | Existing rate near market; prepay heavy; ≤ 24 months to open | Forward rate path adverse; refi capacity tightens |
| C. Hold to maturity | Existing rate competitive; ≤ 36 months to maturity; sale possible at maturity | Maturity-wall execution risk; capacity at refi date uncertain |