Furnace Payback Period

Man repairing a furnace
  • 1 hours
  • Beginner
  • 1,000-18,000

Choosing a furnace is an extremely important—not to mention expensive—decision. Given the high cost of fuel wouldn't homeowners be foolish not to buy the most efficient furnace on the market? If you believe the sales hype, a new furnace will heat your home, conserve energy, and save you money.

If you live in an area that has a long cold season, an energy efficient furnace can dramatically decrease your heating costs. But before you put your money on the line, consider a relatively simple calculation that will provide you some perspective on the potential savings: the furnace payback period.

What is the Furnace Payback Period?

The most common method of measuring a furnace's efficiency is the Annual Fuel Utilization Efficiency or AFUE. Let's imagine you are considering two furnaces: an inexpensive mid-efficiency (80% AFUE) model and a more expensive high-efficiency (90% AFUE) model. Because the higher-efficiency model uses less fuel each month, it will cost less to operate.

However, the initial cost of the furnace and installation is higher. The payback period is the amount of time it takes to pay off that difference in cost based on the energy savings of the more efficient furnace. For instance, suppose that the low-efficiency model would cost $4,500 installed, and the high efficiency furnace would cost $5,500. If you expect the more expensive furnace to save $25 per month ($300 / year) on your fuel bill, the payback period would be a little over three years -- $1,000 / $300.

How to Calculate the Payback Period

making calculations

Start with the difference in cost of the two furnaces. In the example above, the difference was $1,000. (If you haven't received quotes yet, FurnaceCompare.com publishes a furnace price report.)

The second step is to figure out the average expected reduction in your fuel bill. Typically you would begin by pulling together your old fuel bills. If you heat with fuel oil this should be fairly easy -- most likely all of the oil you burn goes for your furnace and you can simply add up the cost shown on your bill. If you have an electric, gas or propane furnace, your calculation may be more complicated. (Here's a hint: compare your average bill in the summer with your average winter bills. Since you don't run your furnace in the summer, the difference between the two bills is a good estimate of your heating costs.) Add up the costs for each month to come up with an average annual cost. In this example, we'll assume your average annual fuel costs are $1,500.

Now, you need to compare the efficiency of your existing furnace to the two alternatives you're considering. If you don't know the exact efficiency of your furnace, here are a few commonly-used rules of thumb: 10-12 years old: 75% efficient; 20+ years old: 60% efficient. So, if your 60% efficient furnace costs you $1,500 per year, how much would you expect the 80% and 90% efficient furnaces to cost? Simply divide the increase in efficiency by the higher efficiency: so, the 80% efficient furnace is (10%/80% = 12.5%) 12.5% more efficient than the 60% efficient furnace, meaning that you should expect to save 12.5% on fuel ($1500 x .125 = $187.50 in savings per year). The 90% furnace would save approximately $333 per year.

At long last we're at it let’s calculate our answer. The 90% efficient furnace will save you $333 - $187.50 = $145.50 per year more than the 80% efficient furnace. Given the $1,000 additional up-front cost, it will take nearly seven years to recoup the difference.

Does this mean you shouldn't buy the more efficient furnace? Not necessarily -- there are all sorts of other factors to consider. You may place a high value on having a "green" furnace. You may be able to find a cheaper high-efficiency furnace. You may be planning on living in the same house for the next 30 years. The payback period is not the only information to consider when purchasing a new furnace -- but it may make your decision easier.