Suppose that you have a $ 172,000 30-year mortgage at 6.11 % interest compounded

Question

Suppose that you have a $ 172,000 30-year mortgage at 6.11 % interest compounded monthly. For 6 years, you pay the only monthly payments required. At the end of the of the sixth year, you have the option to refinance your mortgage with a new 30-year mortgage that has an interest rate of 5.45 % compounded monthly. Answer the following :( Notes: (1) show all your work, (2) Label steps and important values as you solve the problem and (3) Show the variables and the values you enter into TVM Solver)

A. If you were to refinance the current mortgage, find the new monthly payment for the new mortgage. Show , in detail , how you arrived at your answer .

B. If you were to refinance the current mortgage , how much money would you save or lose in interest with this new mortgage ? Show , in detail , how arrived at your answer.

C. Based on your answer in part B , should you refinance the home/mortgage or stay with the current mortgage ? Explain why?

Explanation / Answer

A. The new monthly payment is $806.41 Using a spreadsheet and trial and error I find that $946.34 per month will pay down the original debt and the last payment will be $2.73 more than the usual payment. After six years of this I have made 72 payments and owe 142807.7811 If I want to re-finance this for a new 30 years I put in the 142,807.78 in as the new loan amount and, again by trial and error find the payment that brings my loan down to zero after 360 payments. This is $806.41 and my last payment will be smaller by $1.52 B. We would lose $17,757.44 by switching to the lower rate mortgage. If we add up all of the payments left for the original mortgage and compare it to all of the payments needed for the new mortgage, we will see how much we could save or lose. For the new plan we have $806.41*360 - $1.52 = $290,306.08 For the current mortgage we have $946.34*(360-72) + $2.73 = $272,548.64 So, switching to the lower interest mortgage loses us $17,757.44 C. If we did refinance, but kept sending in our old payment of $946.34 each month, with the extra money ($946.34 - $806.41) going to pay down the principal, we would pay off the new 30 year mortgage in 255 months (earlier than the final payment of the original loan) and we would pay a total of 255*$946.34 +$188.33 = $241,505.03. This would be a savings of $31,043.61 over the life of the original mortgage. So, if we can refinance and pre-pay with no penalty and the costs are low to refinance, it seems like a great idea.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.