| Course | MT431 Real Estate Finance and Ethics |
|---|---|
| Unit | Unit 5 |
| Paper type | Refinance break-even analysis |
| Length | About 850 words, 6 pages double-spaced |
| Format | APA 7 student paper |
| School | Purdue University Global |
| Program | BS in Business Administration |
| Updated | October 2026 |
Free sample paper for MT431 Unit 5
1,101 Months or 16: An MT431 Unit 5 Refinance Break-Even Analysis of Two Options
[Student Name]
Purdue University Global
MT431: Real Estate Finance and Ethics
Unit 5 Refinance Break-Even Analysis
[Instructor Name]
[Date]
Lorraine Pruett and her loan are composite; break-even months and net positions come from the script described, and the sources cited are real.
The Existing Loan
Lorraine Pruett borrowed $304,000 in late 2023 on a 30-year fixed loan at 7.375 percent. Her payment is $2,099.65. She has made 34 payments, leaving a balance of $295,282.74 and 326 payments to go. If she keeps the loan, those payments total $684,487, of which about $389,204 is interest.
The Two Options
Both options refinance the full balance and carry $5,940 of closing costs, which Lorraine would pay in cash rather than add to the loan.
Option 1 is a new 30-year loan at 6.125 percent. Its payment is $1,794.17, lower by $305.48 a month.
Option 2 is a 20-year loan at 5.875 percent. Its payment is $2,094.26, lower by only $5.39 a month.
The Simple Break-Even
The common formula divides closing costs by the monthly payment saving. For Option 1, $5,940 divided by $305.48 gives 19.4 months. For Option 2, $5,940 divided by $5.39 gives 1,101 months, about 92 years.
Read without thought, that second answer says the 20-year loan never pays. It is wrong, because the formula counts only payment savings and ignores where the rest of the payment goes. On the 20-year loan, almost the same payment is buying down a much larger share of principal each month at a lower rate.
The Balance-Aware Break-Even
A better test asks, month by month, whether Lorraine is better off: her cumulative payment savings, plus the difference between the balance she would owe on the old loan and the balance on the new one, must exceed the $5,940 she paid to refinance. That is the amount she would actually be ahead if she sold the house or paid off the loan that month.
By that test, Option 2 breaks even in month 16 and Option 1 in month 20. The 20-year loan pays off faster than the 30-year loan, the reverse of what the simple formula suggests, because its balance falls far faster than the old loan's.
The simple formula gives the 20-year loan 1,101 months; counting the balance, it needs 16.
Net Position Over Ten Years
A line chart plots Lorraine's net position under each option for ten years, measured the same way: payment savings plus balance difference minus closing costs.
After one year she is still behind under both, by about $2,269 under Option 1 and $1,416 under Option 2. After three years she is ahead by about $4,928 under Option 1 and $8,280 under Option 2. After five years, $11,882 against $18,896. After ten years, $27,730 against $49,940. The 20-year option leads from the first month to the last.
The Term Reset
Option 1's lower payment comes partly from restarting the clock. Lorraine has 326 payments left on her current loan; Option 1 gives her 360. She would be paying for 34 months longer than she does now. Comparisons that set the new 30-year payment against the old one without noting this make the lower payment look like pure saving, when part of it is simply spreading the balance over more years.
Option 2 moves the other way. It ends 86 months, a little over seven years, sooner than her current loan.
Remaining Lifetime Payments
Including the $5,940 of closing costs, Option 1's remaining payments total $651,841, about $32,600 less than keeping the current loan. Option 2's total $508,562, about $175,900 less. Interest alone would be about $350,618 under Option 1 and $207,339 under Option 2, against $389,204 on the current loan.
Choosing Between Them
Lorraine's priorities decide the choice. If she needs a lower monthly payment, because her income is uncertain or she wants to save elsewhere, Option 1 gives her $305 a month of room at the cost of a longer loan. If her budget already carries the current payment comfortably, Option 2 keeps the payment almost unchanged and turns the refinance into a much faster payoff.
Keys et al. (2016) found that many households who would have gained from refinancing failed to do so, leaving substantial savings unclaimed, and Agarwal et al. (2013) show that the right moment to refinance depends on the rate gap, the closing costs and how long the borrower expects to keep the loan. Campbell (2006) treats the failure to refinance as one of the clearest examples of costly household financial mistakes. Both of Lorraine's options clear the bar, so the decision here is less whether to refinance than which way to do it.
Recommendation
If Lorraine plans to stay in the house for at least two years and can keep paying about $2,100 a month, Option 2 is the better choice: it breaks even in about sixteen months and saves the most by every measure. Option 1 is the right choice only if lowering the payment matters more to her than the total cost.
References
Agarwal, S., Driscoll, J. C., & Laibson, D. I. (2013). Optimal mortgage refinancing: A closed-form solution. Journal of Money, Credit and Banking, 45(4), 591-622. https://doi.org/10.1111/jmcb.12017
Campbell, J. Y. (2006). Household finance. Journal of Finance, 61(4), 1553-1604. https://doi.org/10.1111/j.1540-6261.2006.00883.x
Keys, B. J., Pope, D. G., & Pope, J. C. (2016). Failure to refinance. Journal of Financial Economics, 122(3), 482-499. https://doi.org/10.1016/j.jfineco.2016.01.031
Reading the MT 431 Unit 5 instructions
The fifth unit asks students to decide whether a borrower should refinance and how. Instructors expect the existing loan restated, with balance and payments remaining, and each refinance option with its rate, term, payment and closing costs. A break-even month, when the borrower has recovered the costs, is the central result. The simple formula, costs divided by payment savings, is widely accepted, but for an option that shortens the term it can give an absurd answer, and a balance-aware method is better. Term reset, the extra years a new 30-year loan adds, should be addressed. Remaining lifetime payments, with costs included, give a second comparison. The recommendation should depend on the borrower's priorities and expected stay. A script or spreadsheet and a net position chart are common.
How this MT431 Unit 5 example is built
The sample restates the existing loan with its remaining payments and interest. Two options follow, each with its payment change. The simple break-even is computed for both, and the 1,101-month result is explained as a flaw in the method. A balance-aware test, counting payment savings plus the difference in balances, gives 16 and 20 months, under a highlighted line contrasting the two answers. A ten-year chart of net position shows the 20-year option ahead throughout. The term reset section counts the 34 months Option 1 adds. Remaining lifetime payments are compared with costs included. A section ties the choice to Lorraine's budget, citing Keys and colleagues, Agarwal and colleagues and Campbell, and the recommendation follows.
MT431 Unit 5 rubric: what earns full points
Refinance analyses are usually graded on a clearly stated break-even month, correct handling of term changes and a recommendation tied to the borrower. Payment savings reported with no month at which costs are recovered is among the most penalized omissions. Rubrics accept the simple formula, but applying it to a term-shortening option and reporting decades without comment shows the method was used without thought. Credit goes to counting balance differences as well as payment savings. Addressing the term reset earns depth marks. Comparing remaining lifetime payments with closing costs included shows completeness. Recommendations that weigh monthly cash flow against total cost, for this borrower, score better than a single figure. A break-even table and a net position chart support the conclusion.
MT431 Unit 5 help: mistakes that cost points
The most common weak analysis divides closing costs by payment savings and stops, even when the new loan has a shorter term. Another frequent error compares a new 30-year payment with the old one without noting the restarted clock. Students often leave closing costs out of lifetime comparisons. Some count only interest saved, ignoring that a shorter loan moves money into principal faster. Recommendations often name the option with the lowest payment by default. Before submitting, compute what the borrower would walk away with if she sold the house in month 24 under each option, including the balance owed. If your break-even month says she is ahead and that figure says she is not, recheck the method.
Get an MT431 Unit 5 example written to your instructions
Current loan terms, payments already made and each refinance quote in the Unit 5 materials are the inputs; add the rubric and the free first analysis follows within 24-48h. Both the shortcut and the balance-aware break-even appear for every option, and the whole calculation runs by script so any month's figure can be checked. The paper above is an original model document written by our desk, not a submitted student paper and not an official Purdue University Global document.
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MT431 Unit 5 questions, answered
What is the simple refinance break-even formula?
Closing costs divided by the monthly payment saving gives the number of months needed to recover those costs. It works reasonably when the new loan has a similar term. It fails when the term shortens, because payments may barely fall while principal drops much faster. Tracking the balance on both loans month by month gives a more reliable answer.
Does refinancing into a new 30-year loan cost more in the end?
It can, because the borrower restarts a full term and pays interest for longer. Whether it does depends on the rate reduction and how long the loan is kept. In the sample, the lower rate still saves $32,646 over the remaining life despite 34 added payments. Compare total remaining payments, including closing costs, before concluding either way.
Should closing costs be paid in cash or rolled into the MT431 case loan?
Both are common. Paying cash keeps the balance lower; rolling costs in preserves savings but adds interest on the financed amount. The break-even calculation must reflect whichever the case assumes, since a financed $5,940 raises both the new payment and the balance. Check whether the prompt specifies, and state the assumption at the top of the analysis.
Where can I find a free MT431 Unit 5 sample paper?
You can read the whole MT431 Unit 5 analysis on this page, testing a 30-year and a 20-year refinance with two break-even methods.
Why does the simple formula fail for the 20-year option in the MT431 Unit 5 sample?
Its payment drops only $5.39, so dividing costs by that gives 1,101 months, while most of the benefit comes from the balance falling far faster.