You borrowed $120,000 for 30 years at 6%. Thirteen years have gone by and you realize...

You borrowed $120,000 for 30 years at 6%. Thirteen years have gone by and you realize interest rates have fallen to 4.25%. You ask your bank about this, and they agree to give you that rate if you will pay $4000 in fees. They recommend you borrow the money for only 17 years, because that was all that was left on your original loan.

What is the effective rate of refinancing this debt?

I know that the answer is 28.89% but im not sure how they got that

Solutions

Expert Solution

So, if we consider first case total repayments would be 8717.87*30= $ 261536.1

For second case after refinancing total repayments = 8717.87*13+7654.25*17+4000= $ 247,454.56

Total savings due to refinancing = $ 261,536.1-$ 247,454.56 = $ 14,081.54

According to above calculations your answer of 28.89% as cost of refinancing debt is highly unlikely, please double check using financial calculator, my above calculations would be helpful to you I hope, the trick is in finding out how much principal outstanding is left over after 13 years using the amortization schedule displayed above. Hope this helps!

jeff jeffy answered 1 year ago

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