Loan Refinance vs Prepayment: Which Saves More?
Compare refinancing and prepayment using break-even month, transfer fees, EMI savings, and total interest saved.
Key takeaway
Bottom-line answer
Refinancing can be better when a lower rate creates savings that exceed transfer fees and the borrower will keep the loan beyond break-even.
When is refinancing better than prepayment?
Refinancing can be better when a lower rate creates savings that exceed transfer fees and the borrower will keep the loan beyond break-even.
When is prepayment better than refinancing?
Prepayment can be better when transfer costs are high, the rate difference is small, or the borrower wants guaranteed principal reduction.
How do I calculate refinance break-even?
Divide total transfer costs by monthly EMI savings. The result is the number of months needed before the refinance starts producing net savings.
Decision checklist
- 1.Compare old and new interest rates.
- 2.Add processing fees, legal costs, transfer charges, and penalties.
- 3.Calculate break-even month.
- 4.Compare refinance savings with direct prepayment savings.
Best for
Borrowers deciding whether to switch lenders or use surplus cash to reduce principal.
Watch out
A lower EMI can still be a bad deal if fees are high or the borrower exits before break-even.
Test the numbers
Use the related VVmatrix calculator to test this decision with your own assumptions, then compare the result with official documents or a qualified adviser.