you bought your house 5 years ago and you believe you will be in the house only

Question

you bought your house 5 years ago and you believe you will be in the house only about 5 more years before it gets too small for your family. Your original home value when you bought it was $250,000, you paid 20% down and you financed closing costs equal to 3% of the mortgage amount. The mortgage was a 30 year fixed-rate mortgage with a 6.5% annual interest rate. Rates on 30-year mortgages are now at 5% if you pay 3 discount points. Your refinancing costs will be 1.5% of the new mortgage amount (excluding points). You won't refinance the points and closing costs this time. A new downpayment is not required. Write down the first three months of your amortization schedule for your initial mortgage. Should you refinance? Ignore all taxes and show your work.

Explanation / Answer

Find the original payment and then find what you owe now:0.80*250,000*1.03 = Pmt * PVIFA(6.5/12,360);

Pmt = $1,302.06

Balance now = $1,302.06 * PVIFA(6.5/12,300);

Balance now = $192,838.61

New payment if refinance$192,838.61 = Pmt * PVIFA(5/12,360);

Pmt = $1,035.2Pmt savings = $1,302.06 - $1,035.2 = $266.86 per month

Refinancing costs = (2%+1.5%)*$192,838.61 = $6,749.35

Find Breakeven time:$6,749.35 = $266.86 * PVIFA(5/12, N);

N = 26.78 months = 27 months / 12 = 2.25years.

You plan on being in the house for 5 more years, so it is worthwhile to refinance

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