Which rule of thumb is generally considered more reliable for refinancing decisions?

The payback period rule is generally considered a more reliable method for refinancing decisions because it focuses on the time it takes to recover the costs of refinancing through savings generated from lower interest payments. This approach allows homeowners and investors to evaluate whether the initial costs associated with refinancing—such as closing costs and fees—can be recouped in a reasonable timeframe through reduced monthly payments.

The clarity of the payback period provides a straightforward metric that can help borrowers understand the financial implications of refinancing. It allows them to assess whether it makes sense to refinance based on their specific financial situation and goals. If the estimated payback period is shorter than the time the homeowner plans to stay in the property, refinancing may be a beneficial decision.

In contrast, methods such as the interest rate spread rule or the total cost of borrowing might not provide as clear a timeline for recouping expenses, and monthly cash flow analysis can be influenced by varying expenditures and future uncertainties that could complicate decision-making. Therefore, focusing on the payback period offers a more concrete framework for assessing the benefits of refinancing within a specific timeframe.