You currently have a $300,000 15 year fully amortizing fixed rate mortgage with

Question

You currently have a $300,000 15 year fully amortizing fixed rate mortgage with a 4.5% rate (Loan A). You had to pay $3,000 in origination fees to get Loan A. After making payments on this loan for 4 years, you consider refinancing your mortgage. The new loan (Loan B) would be for 11 years, also be a fixed rate fully amortizing mortgage and have a 3.90% rate. In order to get Loan B you will need to pay $4,000 in origination fees and your old loan, Loan A, has a 1.5% prepayment penalty if you prepay in the first 3 years. You will pay any prepayment penalties and fees in cash upfront. If you decide to refinance and hold the new loan for 5 years, what will your return be? State your answer as a percentage rounded to two decimal places. (For example, if you answer is two and a half, enter 2.50.)

Explanation / Answer

Balance of Loan A After 4Years is $ 238595/- (Emi calculated for Loan A is $ 2295/- Per Month.)

If we refinance the above balance of $ 238595/- in Loan B @ of 3.9 percent for 11 Years the re stated EMI will be $ 2226/- Per Month

So we need to calculate differences in both Loan (A&B) to detrmine savings

Balance of Loan after 9 Years if we not refinance will be $ 144574/- ( Total Payment (2295 X 108) 247860/- + 3000 origination Fees

Interest 92434/- & Principal $ 155426/-)

Balance of Loan after 9 Years if we refinance will be $ 142681/- ( Total Payment (2295 X 48 + 2226 X 60) +4000+3000 origination fees

So, Balance of liability after end of 9 Years $144574/- $142681

Total Payment made in both situations $250860/- $250720/-

So saving can we calculated as (144574-142681) + (250860-250720) = $ 2033/-

So total saving in result of refinancing at the end of nine years will be $ 2033/-

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