Question

Suppose that you are currently making monthly payments on a $350,000 30-year mortgage at 4.89% interest compounded monthly. For the last 5 years, you have been paying the regular monthly payments. You now have the option to refinance your current mortgage with a new 30-year mortgage that has an interest rate of 4.26% compounded monthly. Note that the lender of the new loan has a closing cost fee of $2,000 (for title insurance, home appraisal costs, etc.) for the new (refinanced) mortgage. The lender stipulates that closing cost must be paid in cash and cannot be part of the new loan. You are to determine whether you would save or lose money in interest if you were to refinance your home. Take the closing costs into account when determining if you would save or lose money.

Show all your work that you used to answer this problem. Label the steps (with short sentences) that you use and important values as you solve the problem. Note that when you use the TVM Solver, show the all variables and the values you entered (into the variables) and solved for. Your final answer should be in the form of two or three sentences that summarizes your findings.

Answer 1

To solve this, we first need to find the principal still outstanding after 5 years

Formula view:

Thus we see that there is a net interest saving in dollar terms if we refinance the loan even after accounting for the closing fee of $2000. So we should refinance the loan as per the new mortgage plan.