Question

Consider a 30-year, $165,000 mortgage with a rate of 5.85 percent. Eight years into the mortgage, rates have fallen to 5 percent. What would be the monthly saving to a homeowner from refinancing the outstanding mortgage balance at the lower rate? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Savings:

Answer 1

Information provided:

Present value= $165,000

Time= 30 years*12= 360 months

Interest rate= 5.85%/12= 0.4875% per month

The amount of monthly mortgage payment is calculated by entering the below in a financial calculator:

PV= -165,000

N=360

I/Y= 0.4875

Press the CPT key and PMT to compute the amount of monthly mortgage.

The value obtained is 973.40.

Therefore, the amount of monthly mortgage payment at a rate of 5.85% is $973.40.

Interest rate= 5%/12= 0.4167% per month

The amount of monthly mortgage payment at an interest rate of is calculated by entering the below in a financial calculator:

PV= -165,000

N=360

I/Y= 0.4167

Press the CPT key and PMT to compute the amount of monthly mortgage.

The value obtained is 885.76.

Therefore, the amount of monthly mortgage payment at a rate of 5% is $885.76.

The amount of monthly savings at the lower rate is $973.40 - $885.76

                                                                                = $87.64.

In case of any query, kindly comment on the solution.