Question

3. Kramer is trying to decide whether or not to refinance his home. He borrowed $400,000 to buy the home 7 years ago. He took out a 30 year mortgage at a rate of 5.5%. He can refinance today with a 30 year loan at a rate of 4%. Closing costs are estimated to be about $6,000. Should Kramer refinance if he expects to be in the house for about one more year? 5 more years? (5 Points) Kramer can also refinance for 15 years at 3%.   Should he do this based on the same one and five year criteria? Is there anything else he might want to consider with this option? (5 Points)

Answer 1

Original Loan Amount (PV)=400000, monthly rate=5.5%/12=0.458%, nper=30*12=360, PMT=?

His present monthly mortgage payment is $2271.26 and below is the amortization schedule:

Hence, after 7 year or 7*12=84 month, outstanding loan amount is $355263.55

Hence, including closing cost, the new loan amount you have to take(PV)= 355263.55+6000=361263.55, monthly interest=4%/12=0.333%, nper=12*30=360, pmt=?

Now, for earlier loan he still needs to pay =2271.16*(360-84)=$626839.05 to payoff the loan completely but for the new loan he needs to pay total of 1724.73*360=620901.88 to payoff the loan.

Hence, if he want to stay 1 or 5 or more than 5 year, he will end up repaying less money with the new mortgage. Hence, he should refinance the loan.

If Kramer refinance using the 15 years at 3%, then Loan (PV)= 355263.55+6000=361263.55, monthly interest=3%/12=0.25%, nper=12*15=180, pmt=?

Here in this case, she has to pay total of =2494.82*180=$449067.6 to repay the complete loan which is much lower than the original loan.

Hence, he should refinance using this option.