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24 December, 02:41

Suppose a homeowner has an existing mortgage loans with these terms:

Remaining Balance: $150,000

Interest Rate: 8%

Remaining Term: 10 years (monthly payments)

This loan can be replaced by a loan at an interest rate of 6%, at a cost of 3% of the outstanding loan amount.

What is the net benefit (cost) to refinance?

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  1. 24 December, 05:40
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    Using a loan calculator we can determine the current monthly payment:

    principal = $150,000

    APR = 8%

    n = 10 years

    payment = ? = $1,819.91

    total interest charged during the 10 years = $68,389.67

    A bank may offer you to refinance your loan at a 3% cost, and that amount is added to the principal, then we can calculate the monthly payments and total interest charged:

    principal = $154,500

    APR = 6%

    n = 10 years

    payment = ? = $1,715.27

    total interest charged during the 10 years = $51,332.01

    Another option you might get is to refinance your loan at a 3% cost, and pay the $4,500. Then we can calculate the monthly payments and total interest charged:

    principal = $150,000

    APR = 6%

    n = 10 years

    payment = ? = $1,665.31

    total interest charged during the 10 years = $49,836.90

    depending on your bank and what refinancing option they give you, you might end up saving a lot of money:

    option 1: refinancing costs are added to the principal ⇒ save $12,557.66

    after the 10 years you will pay a total of $205,832.01, which is $12,557.66 lower than your current mortgage ( = $218,389.67 - $205,832.01), plus you get a lower monthly payment.

    option 2: refinancing costs are paid upfront ⇒ save $14,052.77

    after the 10 years you will pay a total of $199,836.90 + $4,500 = $204,336.90, which is $14,052.77 lower than your current mortgage ( = $218,389.67 - $204,336.90), plus you get a lower monthly payment. The downside is that you need the $4,500 to pay for the refinancing fees.
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