Question

Suppose that you are in the process of deciding whether or not to refinance your fixed rate mortgage at a lower rate and you are interested in using the payback period rule of thumb to help you in your decision. Your lender has informed you that the cost of refinancing would be $4,300. If your original monthly mortgage payment was $1,250 and your new monthly mortgage payment would be $1,150 after refinancing, determine the payback period.

Answer 1

3.5833 years

Step-by-step explanation:

The computation of the payback period is shown below:-

Payback period = Cost of refinancing ÷ ( Original Mortgage payment - New payment)

= $4,300 ÷ ($1,250 - $1,150)

= $4,300 ÷ $100

= 43 months

Payback period would be 43 months

or

= 3.5833 years

So, for computing the payback period we simply applied the above formula.