Given the recent drop in the mortgage interest rates, you have decided to refina

Question

Given the recent drop in the mortgage interest rates, you have decided to refinance your home. Exactly five years ago, you obtained a $150 000 30-year mortgage with a fixed rate of 10%.Today, you can get a 30 year loan for the outstanding loan balance at 7.5% interest rates. 7.5% interest. This loan however requires you to pay a $500 appraisal fee and 2 points at the time of the refinancing (1 point 1% of the amount borrowed), Ignore the tax considerations. By how much will your monthly payments drop if you refinance.

Explanation / Answer

Outstanding Balance of Loan as on Today Current Monthly Payment $150000 = C {[ 1-1/(1+0.10/12)^360]/(0.10/12)} $150000 = 113.95 C C= $ 1316.36 Present value of loan Amount PVA = $1316.36{[ 1-1/(1+0.10/12)^360]/(0.10/12)} PVA= $ 144861.77 Monthly Payment of loan after refinancing at 7.5% $144861.77= C {[ 1-1/(1+0.075/12)^360]/(0.075/12)} $144861.77= 143.02 C C= $ 1012.89 Monthly Drop down in the amount of Monthly payment after refinancing = $1316.36- $ 1012.89 = $ 303.47

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