The mortgage on your house is five years old. It required monthly payments of $1

Question

The mortgage on your house is five years old. It required monthly payments of $1,402, had an original term of 30 years, and had an interest rate of10% APR in he intervening five years interest rates have fallen and so you have decided o refinance hat is, you will roll overthe outstanding balance nto a new mortgage. The new mortgage has a 30-year term, requires monthly payments, and has an interest rate of 6.625% (APR) a. What monthly repayments will be required with the new loan? b. If you still want to pay off the mortgage in 25 years, what monthly payment should you make after you refinance? c. Suppose you are willing to continue making monthly payments of S1,402. How long will it take you to pay off the mortgage after refinancing? d. Suppose you are willing to continue making monthly payments of $1,402 and want to pay off the mortgage in 25 years. How much additional cash can you borrow today as part of the refinancing?

Explanation / Answer

1) Solution: $987.91

Working:

PMT=$1402

Annual Rate=10/12= 0.8333%

Periods=25*12 = 300

PV= $154,286.70

Annual Rate= 6.625/12 = 0.55208%

Periods= 30*12 = 360

PMT=$987.91

2) Solution: $1058.83

Working:

PV=$154,286.70; Periods=300; Annual Rate=0.55208%

PMT=$1053.83

3) Solution: 170 months

Working:

PV=$154,286.70; Annual Rate=0.55208%; PMT=$1402

Periods=14 years and 2 Months; or 170 Months

4) Solution: $50,973.28

Working:

PMT=$1402; Periods=300; Annual Rate=0.55208%

Present value=$205,259.98

Additional cash = $205,259.98 - $154,286.70

= $50,973.28

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