Now we need to take it a step farther. Which is the right choice? Is cheapest best?
$400,000 at 3.625% has a monthly payment of $1,824.21
$400,000 at 3.750% has a monthly payment of $1,852.46
$400,000 at 3.875% has a monthly payment of $1,880.95
Now let’s refocus. This is a refinance. So now we see the cost options, how do we know which is best? Let’s say that our hypothetical borrower’s $400,000 loan has a 4.5% interest rate. If this was originally $440,000 loan, then the monthly payment is $2,229.41.
Refinancing to 3.625% would save $405.20 per month, but the rate cost $6,725. It will take 16.59 months of saving $405.20 per month to recuperate the $6,725 cost of refinancing.
Refinancing to 3.750% would save $376.95 per month, but the rate cost $3,725. It will take 9.88 months of saving $376.95 per month to recuperate the $3,725 cost of refinancing.
Refinancing to 3.875% would save $348.46 per month, but the rate cost $225. It will take less than 1 month of saving $348.46 per month to recuperate the $225 cost of refinancing.