What is the simple payback period when paying $4,000 to save $109.89 per month with a new 5.5% mortgage?

To calculate the simple payback period, you need to determine how many months it will take for the savings generated from an investment to recoup the initial outlay. In this case, the initial investment is $4,000, and the monthly savings are $109.89.

To find the payback period, you divide the total cost by the monthly savings:

Payback Period = Initial Investment / Monthly Savings

Substituting in the values:

Payback Period = $4,000 / $109.89 ≈ 36.4 months

This calculation shows that it takes approximately 36.4 months to recover the initial investment of $4,000 through the monthly savings of $109.89. This length of time indicates that the investment has a relatively long payback period, likely reflecting the nature of mortgage-related savings, which can take time to accumulate significant returns based on the monthly savings from lowering mortgage payments.

This framework is essential in personal finance as it helps individuals evaluate the efficiency and timeframe of their investments against their financial goals. Understanding the payback period not only aids in making informed decisions about budgeting and investments but also in assessing whether current financial conditions justify waiting for such savings to materialize over time.