In: Finance
Suppose you currently have 25 years remaining on a mortgage that started as a $200,000, 30-year 6% mortgage. Your current balance is $186,108.71. Your current payment (including both principal and interest) is $1,199.10. Ignoring closing costs, evaluate whether you should refinance into a 30-year 5%mortgage or a 15-year 4% mortgage. Determine the following for both alternatives:
a. What would be the new monthly payment assuming you refinance the existing balance of $186,108.71?
b. What would be the total accumulated interest savings over the life of the mortgage (the total interest costs of the new mortgage minus the total interest costs of the existing mortgage) ignoring differences in the time value of money?
c. What factors will you take into account for your alternatives?
Part a) For the new 30 year loan, the monthly payment is calculated as follows:
We are given the following information:
r | 5.00% |
n | 30 |
frequency | 12 (monthly) |
PV | $ 1,86,108.71 |
We need to solve the following equation to arrive at the
required PMT:
So the Monthly payment is 999.07
For the new 15 year loan, the monthly payment is calculated as follows:
We are given the following information
r | 4.00% |
n | 15 |
frequency | 12 |
PV | $ 1,86,108.71 |
We need to solve the following equation to arrive at the required PMT:
So the monthly payment is 1376.62
b) Accumulated savings on interest is calculated below
Particulars | Existing | New 30 Year | New 15 year |
Year Remaining | 25 | 30 | 15 |
Number of payments per year | 12 | 12 | 12 |
Total payments remaining | 300 | 360 | 180 |
Monthly payment | $ 1,199.10 | $ 999.07 | $ 1,376.62 |
Principal | $ 1,86,108.71 | $ 1,86,108.71 | $ 1,86,108.71 |
Total payments | $ 3,59,730.32 | $ 3,59,665.85 | $ 2,47,792.26 |
Interest | $ 1,73,621.61 | $ 1,73,557.14 | $ 61,683.55 |
Savings | $ 64.47 | $ 1,11,938.06 |
C)