Net present value stems from the idea that there is a time value of money. That is, a dollar today is worth more than a dollar a year from now. So since money is worth less in the future, it is harder to compare mortgage payments made this year to mortgage payments that will be made in thirty years. In order to compare the two, we find the present value, or the value today, of the payments made in the future. Someone's net present value is the sum of the all the present values of the future payments, both payments received, like the initial value of the loan, and payments made, like mortgage payments.

Payments on mortgages are set so that someone's net present value is equal to zero. When refinancing, however, it is possible to increase the net present value, because the interest rate could decrease enough to make the present value of the payments on the new loan less than the present value of the payments that would have been made. An optimal refinance is one that increases net present value.