Question

Ali and sarah plan to refinance their mortgage to obtain a lower interest now that rates have dropped 2-3 percentage points.  A ‘refinance’ will reduce their mortgage by $110 a month with a new interest rate. Their closing costs for refinancing the loan will be $1700. How long will it take them to cover the cost of refinancing? They will move to another state in three years when Savannah retires. Should they refinance?

Answer 1

Saving in mortgage costs= $110

Closing cost= $1700

So the number of months taken to cover the cost of refinancing= 1700/110 = 15.45 months

Since they will move to another state in 3 years (36 months), they will be able to gain the complete benefit from the additional closing cost. The benefit will further continue for the rest of the period.

Hence they should refinance the loan.