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.

Question

Quizplus · Accepted Answer

The payback period can be calculated by dividing the cost of refinancing by the monthly savings:
Payback period = Cost of refinancing / Monthly savings
Payback period = $4,300 / ($1,250 - $1,150) 
Payback period = $4,300 / $100
Payback period = 43 months 
Therefore, it would take 43 months to recoup the cost of refinancing through the monthly savings, making option C the best choice.

Suppose That You Are in the Process of Deciding Whether