The basic concept of a payback period is that it equals the amount of years it takes to earn back an upfront payment used to gain income or reduce expenses. Regarding mortgages, a payback period refers to how long it takes to repay the closing costs required to obtain refinancing or purchase points.

To buy points when purchasing a home or to refinance a mortgage, closing costs must be paid. The cost of points is considered part of the closing costs. In both cases, the upfront expense is regained at the end of the payback period, and the home owner begins saving money on mortgage payments. Because of this, it is generally not financially helpful for the owner to refinance or pay points when he or she expects to sell the property soon. However, owners cannot always realistically predict how long it will take to sell their homes, especially when factors outside their control impact the local or national real estate market.

For example, a home buyer takes out a thirty-year $110,000 mortgage and pays $3,300 for three points. This amount is added to the closing costs, and reduces the interest rate by 0.75 percent. He would save about $55 per month, so the payback period would last for 61 months (just over five years). To make paying points worth the expense, he would have to stay in the home for a period of time at least one month longer than this. During an entire thirty year term, the total savings would amount to just under twenty thousand dollars, making the initial cost an effective investment.

Finding the length of the payback period for refinancing is more complex; someone who refinances an adjustable rate mortgage to a fixed rate (or vice versa) will have to use estimation, as there is no certainty of how much the rate might change. The maximum rate and the time period in between adjustments can be used to help predict the cost of an adjustable mortgage to some extent. It is easier to determine the payback period if refinancing immediately produces monthly savings, such as when a lower rate is obtained.

The concept of a payback period can also apply to other housing related expenditures, such as installing a more efficient heating system or insulating the walls. There is a significant initial cost, but these purchases provide additional savings as someone stays in the home for a longer length of time.