Refinancing a loan problem?
You have been living in the house you bought 10 years ago for $300,000. At that time, you took out a loan for 80% of the house at a fixed rate 15-year loan at an annual stated rate of 9%. You have just paid off the 120th monthly payment. Interest rates have meanwhile dropped steadily to 6% per year, and you think it is finally time to refinance the remaining balance. But there is a catch. The fee to refinance your loan is $4,000. Should you refinance the remaining balance? How much would you save/lose if you decided to refinance?
Answers & Comments
Verified answer
BeeFree
the answer got wrong at the very last step.
Savings over 5 years = (2434.24 - 2267.07) (5 x 12) = 10,030.20
should be:
savings at the end of the 10th year: pv(0.06/12,60, 2434.24 - 2267.07)
or savings at the end of the 15th year: fv(0.06/12,60, 2434.24 - 2267.07)
huhuhu
loan = 300000 x 80% = 240000
Monthly Payment over 15 years = 2434.24
Balance at 120 months = 117,265.54
New Payment at 6% = 2267.07
Savings over 5 years = (2434.24 - 2267.07) (5 x 12) = 10,030.20
Answer: Net Savings = 10,030.20 - 4000 = 6,030.20 over remaining 5 years. So, yes you should refinance
hope that helps
but in test were only these various of answer:
1.(yes, gain 4647)
2. (yes, gain 3300)
3. (yes, gain 4053)
4. (no, lose 2331)
5. (no, lose 2300)
6. (no, lose 1323)
So, what is right answer?
4746 gain
great insightful replies, thank you