Assume that you are 10 years into a 30 year home loan at 5%. You owe $200,000 le
ID: 2651436 • Letter: A
Question
Assume that you are 10 years into a 30 year home loan at 5%. You owe $200,000 left on your home at this time. You can refinance your loan at 4% for 20 years; however the TOTAL closing costs will be around $3000.
If you go for refinancing, how many more months would you need to live in the home in order to get the closing cost back? Ignore time value of money and tax credits of the interest payments (i.e. Simple Payback)_______________
Answer part (a) again considering time value of money and MARR 10% compounded monthly. Ignore tax credits of interest again _______________
Explanation / Answer
Assume that you are 10 years into a 30 year home loan at 5%. You owe $200,000 left on your home at this time. You can refinance your loan at 4% for 20 years; however the TOTAL closing costs will be around $3000.
If you go for refinancing, how many more months would you need to live in the home in order to get the closing cost back? Ignore time value of money and tax credits of the interest payments (i.e. Simple Payback)_______________
TOTAL closing costs = $ 3000
Currently Monthly payment = pmt(rate,nper,pv,fv)
rate = 5%/12
nper = 20*12 = 240
pv = 200000
fv = 0
Currently Monthly payment = pmt(5%/12,240,-200000,0)
Currently Monthly payment = $ 1319.91
Proposed Monthly payment = pmt(rate,nper,pv,fv)
rate = 4%/12
nper = 20*12 = 240
pv = 200000
fv = 0
Proposed Monthly payment = pmt(4%/12,240,-200000,0)
Proposed Monthly payment = $ 1211.96
Monthly Saving = 1319.91 - 1211.96
Monthly Saving = $ 107.95
No of months would you need to live in the home in order to get the closing cost back = TOTAL closing costs /Monthly Saving
No of months would you need to live in the home in order to get the closing cost back = 3000/107.95
No of months would you need to live in the home in order to get the closing cost back = 27.79 Months
Answer part (a) again considering time value of money and MARR 10% compounded monthly. Ignore tax credits of interest again _______________
TOTAL closing costs = $ 3000
Currently Monthly payment = pmt(rate,nper,pv,fv)
rate = 5%/12
nper = 20*12 = 240
pv = 200000
fv = 0
Currently Monthly payment = pmt(5%/12,240,-200000,0)
Currently Monthly payment = $ 1319.91
Proposed Monthly payment = pmt(rate,nper,pv,fv)
rate = 4%/12
nper = 20*12 = 240
pv = 200000
fv = 0
Proposed Monthly payment = pmt(4%/12,240,-200000,0)
Proposed Monthly payment = $ 1211.96
Monthly Saving = 1319.91 - 1211.96
Monthly Saving = $ 107.95
Considering time value of money
No of Month needed = nper(rate,pmt,pv,fv)
rate = 10%/12
pmt = 107.95
pv = 3000
fv = 0
No of Month needed = nper(10%/12,107.95,-3000,0)
No of Month needed = 31.74 Months