Question

Five years ago, Richard borrowed $300,000 to purchase a house in Sandy Lake. At the time, the quoted rate on the mortgage was 6 percent, the amortization period was 25 years, the term was 5 years, and the payments were made monthly. Now that the term of the mortgage is complete, Richard must renegotiate his mortgage. If the current market rate for mortgages is 8 percent, what is Richard’s new monthly payment? (Round effective monthly rate to 6 decimal places, e.g. 25.125412% and final answer to 2 decimal places, e.g. 125.12. Do not round your intermediate calculations.)

Answer 1

First, Let's find the monthly payment with initial interest rate of 6%

PV = 300,000

Monthly interest rate, I/Y = 6%/12 = 0.005 = 0.5%

I/Y = 0.5

Number of payments, N = 25 * 12

N = 300

FV = 0

CPT PMT

PMT = $1,932.90420446

(Ignore negative sign in PMT)

Now, let's find the loan outstanding after 5 years with I/Y = 0.5% per month

Number of payments remaining, N = (25 - 5) * 12 = 240

I/Y = 0.5

PMT = -1,932.90420446

FV = 0

CPT PV

PV = $269,796.26044722

Loan outstanding after 5 years = $269,796.26044722

Finally, we will find the new monthly payment with an interest rate of 8%

N = 240

I/Y = 8%/12

I/Y = 0.66666667

PV = 269,796.26044722

FV = 0

CPT PMT

PMT = $2,256.68

Richard's new monthly payment is $2,256.68 at the current market rate of 8 percent.