Question

6-Assume that you are 10 years into a 30 year home loan at 5%. You owe $200,000 left on your home at this time. You can refinance your loan at 4% for 20 years; however the TOTAL closing costs will be around $3,000.

If you go for refinancing, how many more months would you need to live in the home in order to get the closing cost back? Ignore time value of money and tax credits of the interest payments (i.e. Simple Payback)_______________

Answer Q6 again considering time value of money with annual MARR 10% compounded monthly.

Answer 1

1. If you dont go for financing the monthly payment of the loan is 1319.91$. and the payment schedule for first 20 months is provided below:

	Opening Balance	interest applicable	Monthly Payment	Closing Balance
Month 0				200000
Month 1	200000	833.3333	1319.91	199513.42
Month 2	199513.4	831.3059	1319.91	199024.82
Month 3	199024.8	829.2701	1319.91	198534.17
Month 4	198534.2	827.2257	1319.91	198041.49
Month 5	198041.5	825.1729	1319.91	197546.75
Month 6	197546.8	823.1115	1319.91	197049.95
Month 7	197050	821.0415	1319.91	196551.08
Month 8	196551.1	818.9628	1319.91	196050.13
Month 9	196050.1	816.8755	1319.91	195547.10
Month 10	195547.1	814.7796	1319.91	195041.96
Month 11	195042	812.6749	1319.91	194534.73
Month 12	194534.7	810.5614	1319.91	194025.38
Month 13	194025.4	808.4391	1319.91	193513.90
Month 14	193513.9	806.3079	1319.91	193000.30
Month 15	193000.3	804.1679	1319.91	192484.56
Month 16	192484.6	802.019	1319.91	191966.67
Month 17	191966.7	799.8611	1319.91	191446.61
Month 18	191446.6	797.6942	1319.91	190924.40
Month 19	190924.4	795.5183	1319.91	190400.00
Month 20	190400	793.3334	1319.91	189873.43

however if you go for refinancing theloan value increases by 3000 $ and interest decreases by 1% annually. hence with the monthly Payment (calculated) 1230.14$ the repayment scedule for first 20 months is provided below:

	Opening Balance	interest applicable	Monthly Payment	Closing Balance
Month 0				203000
Month 1	203000	676.6667	1230.14	202446.53
Month 2	202446.5	674.8218	1319.91	201801.44
Month 3	201801.4	672.6715	1319.91	201154.20
Month 4	201154.2	670.514	1319.91	200504.80
Month 5	200504.8	668.3493	1319.91	199853.24
Month 6	199853.2	666.1775	1319.91	199199.50
Month 7	199199.5	663.9983	1319.91	198543.59
Month 8	198543.6	661.812	1319.91	197885.49
Month 9	197885.5	659.6183	1319.91	197225.20
Month 10	197225.2	657.4173	1319.91	196562.70
Month 11	196562.7	655.209	1319.91	195898.00
Month 12	195898	652.9933	1319.91	195231.08
Month 13	195231.1	650.7703	1319.91	194561.94
Month 14	194561.9	648.5398	1319.91	193890.57
Month 15	193890.6	646.3019	1319.91	193216.96
Month 16	193217	644.0565	1319.91	192541.11
Month 17	192541.1	641.8037	1319.91	191863.00
Month 18	191863	639.5433	1319.91	191182.63
Month 19	191182.6	637.2754	1319.91	190499.99
Month 20	190500	635	1319.91	189815.08

the closing cost is believed to br got back if the closing balance from refinancing becomes lower than that of without refinancing in any month. from the above 2 tables this happens in Month 20. hence 20 months you need to live in the home in order to get the closing cost back.