Five years ago, you bought a house for $151,000, with a down payment of $30,000, which meant you took out a loan for $121,000. Your interest rate was 5.75% fixed. You would like to pay more on your loan. You check your bank statement and find the following information:
Escrow payment
$211.13
Principle and Interest payment
$706.12
Total Payment
$917.25
Current Loan Balance
$112,242.47
It might be possible to pay the current balance off in 20 years if you refinanced the loan at a lower interest rate. The interest rate that you qualify for will depend, in part, on your credit rating. Identify the highest interest rate you could refinance at in order to do this and determine the interest rate that would require a monthly total payment that is less than your current total payment. Also, refinancing costs you $2000 up-front in closing costs.
Explain whether it is more or less reasonable to consider refinancing your loan. In order to answer this, you need to look at different interest rates. Know that if you refinance, your minimum monthly payments will be based on a 30-year loan (though you still want to be done in 20 years). Also, refinancing costs you a couple of thousand dollars up front in closing costs.
See previous post.
To determine the highest interest rate at which you could refinance your loan and still have a monthly total payment less than your current payment, we need to compare the costs and benefits of refinancing.
First, let's calculate the remaining number of payments you have left on your current loan. Since you want to pay off the loan in 20 years, you have already made 5 years of payments. Therefore, you have 20 - 5 = 15 years remaining.
Next, let's calculate the total interest you would pay if you continue with your current loan. To do this, we need to calculate the total payments made over the loan term and subtract the initial loan amount. The monthly total payment is $917.25, so the total payments over 15 years will be 15 * 12 * $917.25 = $165,105. Therefore, the total interest paid is $165,105 - $121,000 = $44,105.
Now, let's consider refinancing. Since you want to pay off the loan in 20 years but your minimum monthly payments will be based on a 30-year loan, we need to calculate the minimum monthly payment for a 30-year loan. Let's assume we're refinancing at an interest rate of x%. Using a mortgage calculator or formula, we can calculate the new minimum monthly payment. For simplicity, let's assume there are no additional closing costs.
The loan amount after refinancing will be the current loan balance of $112,242.47, plus the closing costs of $2000, which totals $114,242.47. Using a mortgage calculator with a 30-year term and x% interest rate, we find that the new minimum monthly payment will be approximately $607.51.
To compare the costs and benefits, we need to calculate the total payments for the refinanced loan over 20 years. The monthly payment is $607.51, so the total payments over 20 years will be 20 * 12 * $607.51 = $145,803.60. Therefore, the total interest paid would be $145,803.60 - $114,242.47 = $31,561.13.
Now, let's compare the total interest paid for the current loan ($44,105) with the total interest paid for the refinanced loan ($31,561.13). It is clear that refinancing would result in paying less interest over the remaining term of the loan.
However, we need to consider the closing costs of $2000 for refinancing. Subtracting the closing costs from the interest savings, we find that refinancing would save $44,105 - $31,561.13 - $2000 = $10,543.87.
Based on these calculations, it is reasonable to consider refinancing your loan as it would allow you to save on interest payments over the remaining term. The highest interest rate you could refinance at, while still resulting in a monthly total payment lower than your current payment, can be determined by comparing the monthly payments for different interest rates using the same methodology explained above.