When Patrick purchased his home, he borrowed $150,000 from his bank at 6% intere

Question

When Patrick purchased his home, he borrowed $150,000 from his bank at 6% interest rate per year to be repaid in 180 equal annual end-of-month payments in 15 years. After making 120 payments, Patrick found he could refinance the balance due on his loan at 5% interest for the remaining 5 years. To refinance the loan, Patrick must pay the original lender the balance due on the loan, plus a penalty charge of 2% of the balance due for this new 5-year loan. To the new lender he also must pay a $1,000 service charge to obtain the loan. The new loan would be made equal to the balance due on the old loan, plus the 2% penalty charge of the amount owed to be paid to the previous lender, and the $1,000 service charge to the new lender. Should Patrick refinance the loan, assuming that he will keep the house for the next 5 years? Use an annual cash flow analysis for solving this problem.

Explanation / Answer

Using pmt we can find the monthly amount to be paid for next 180 months

=pmt(rate,nper,pv,fv,type)

=pmt(6%/12,180,-150000,0,1)

=1265.79

For the first 120 months we can find the total principal paid using cumprinc formuale in excel

=cumprinc(rate,nper,pv,start,end,type)

=CUMPRINC(6%/12,180,150000,1,120,0)

=84,526.55

So the principal left to be repaid is =150000-84526.55=65473.45

New loan required=65473.45+(65473.45*2%)+1000=67782.92

Let us find the pmt for the above amount at 5%

=pmt(5%/12,60,67782.92,0,0)

=1279.15

since the above monthly amount is higher than previous amount of 1265.79, he should nor refinance the loan

=

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