Jack and Amy Johnson live in a three-bedroom home with their children, Kate and
ID: 2630886 • Letter: J
Question
Jack and Amy Johnson live in a three-bedroom home with their children, Kate and Alex. They bought their home three years ago with a $200,000, 30-year, fixed-rate mortgage at a 7 percent interest rate. They have made 36 monthly payments, and they are interested in refinancing for a lower rate, the Johnsons checked their current lender for the refinancing rate and terms being offered to them. The loan offered was a 5.5 percent interest rate for another 30-year fixed-rate loan. The closing cost for new loan is $2000. They plan on staying in this home for another 5 years.
Explanation / Answer
Total Principal & Interest payment on a 30 year, 7% mortgage would be $1,330/month. After making 36 payments, the remaining principal would be approximately $193,500. By refinancing, the P&I payment on a $193,500, 30 year mortgage would decrease to $1,090/month, which is a savings of $240/month. They would recover the $2K cost of closing on the new loan in 9 months. If the Johnsons are planning on staying in the house for 5 years, they should refinance.
Another cost savings would be total interest paid on the loan. The total interest on a 30 yr, 7%, $200K mortgage is $279K. The total interest on a 30 yr, 5.5%, $193,500 mortgage is $202K. Over the course of the loan, this is a savings of $77K. If they only plan to stay 5 years, there is still a savings on interest paid. Interest paid on the 7% mortgage would be $68K, while interest paid on the 5.5% loan would be $51K, which is a $17K savings.
Overall they should definitely refinance.
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