Question

In: Accounting

You take out a 25 year, $275, 000 mortgage with constant payments at the end of...

You take out a 25 year, $275, 000 mortgage with constant payments at the end of each month and i (12) = 6%. After 15 years, you wish to refinance the mortgage with a 10 year mortgage (also with constant payments at the end of each month) so that you pay $100 less each month than you originally were paying. Find the monthly nominal interest rate corresponding to this new mortgage

Solutions

Expert Solution

Answer :

Loan present value (PV) = $275,000

Interest rate = 6% for first 15 years, compounded monthly = 6/12 = 0.50%

Loan period [NPER] = 25 years, Monthly = 25*12 = 300

Refinance the mortgage with a 10 year mortgage, so that you pay $100 less each month

To find the monthly nominal interest rate corresponding to this new mortgage we have to use PMT, PV and RATE function in excel

PV -275,000
NPER 300
Monthly interest rate 0.50%
Monthly payment $1,771.83
Remaining NPER 120
PV $159,594.74
Monthly payment $1,671.83
Monthly interest rate 0.3942%

Therefore monthly nominal interest rate corresponding to this new mortgage will be approximately 0.39%

Working

- A B
1 PV -275000
2 NPER =25*12
3 Monthly interest rate =6%/12
4 Montly payment =PMT(B3,B2,B1,0)
5 - -
6 Remaining NPER =10*12
7 PV =PV(B3,B6,-B4,0)
8 Monthly payment =B4-100
9 Montly interest rate =RATE(B6,-B8,B7,0)

ekkarill92 answered 8 months ago
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