How to calculate mortgage closing cost payback
It’s really simple. Simply take your total closing costs and divide by your monthly savings. In the first scenario above (with the 10/1 ARM), closing costs are estimated by Credit Sesame to be $2,080 and with savings of $137.22, the payback period would be a little over 15 months. Obviously, some people will want to calculate interest lost during that year and three months but with savings account rates at one percent (and even CD rates at 1.3 percent), there isn’t much point … maybe $20 to $24.
The second example doesn’t have such a rosy payback period — not only is the payment savings much less, but the closing costs on a fixed rate loan are substantially higher (not sure why). Closing costs were estimated to be $3,849 and with savings of only $65.88 per month, the payback period would be a discouraging 58 months … almost 5 full years.
An important consideration when refinancing to a lower payment
Save your savings … at least a part of your savings anyway. If you aren’t careful, you’ll adjust your spending requirements to absorb every thin dime of your monthly payment savings.