Question

Consider a 20-year, $180,000 mortgage with a rate of 6.3 percent. Four years into the mortgage, rates have fallen to 5 percent. Suppose the transaction cost of obtaining a new mortgage is $1,900.

Quantify the effect of the homeowner's decision. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Monthly savings ________

Answer 1

ANSWER-

mortgage : 20 years, $180000, 6.3% p.a.

monthly instalment = 1320.92 (according to 20 years term)

after four years, mortgage balance i.e. principal balance = 159539

transaction cost of new mortgage = $1900

new mortgage amount required is $159539, 16 years, 5% p.a.

monthly instalment =$1208.80 (according to 16 years term i.e. 20-1-4 = 16 )

mothly savings = $1320.92 -$1208.80 = $112.12

*assuming that loan will not be available for $159539, so next nearest amount is $160000

let us take $160000, 16 years, 5% p.a.

monthly instalment =$1212.29 (according to 16 years term i.e. 20-1-4 = 16 )

mothly savings = $1320.92 -$1212.29 = $108.63

note: mortgage loan amortisation table , amount : P= $180000, R =6.3%, N= 20 years

formula => EMI = [P x R x (1+R)^N]/[(1+R)^N-1]

years	principal	interest	payments (p+i)	balance principal
1	4,644	11,207	15,851	1,75,356
2	4,945	10,906	15,851	1,70,412
3	5,265	10,586	15,851	1,65,146
4	5,607	10,244	15,851	1,59,539