Five years ago, you bought a house for $171,000. You had a down payment of $35,000, which meant you took out a loan for $136,000. Your interest rate was $5.6% fixed. You would like to pay more on your loan. You check your bank statement and find the following information.
Escrow payment: $232.78
Principle and Interest payment: $751.90
Total payment: $984.68
Current Loan balance: $121,259.44
Then, answer these questions:
1. Assuming you currently meet your monthly expenses with no left over to speak of, how much more money a month do you need to make in order to pay off your loan in 20 years instead of 25? Is this reasonable?
2. Is it 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 thirty-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.
$121,259.44 @ 5.6% for 20 yrs.
Pt = Po*r*t / (1 - (1+r)^-t),
r=5.6% / 12 = 0.46667% / mo = 0.004667 = Monthly % rate expressed as a decimal.
t = 20yrs * 12mo/yr = 240 mo.
Pt=121,259.44*0.004667*240 / (1-(1.004667)^-240 = 135,820.27/0.672895=
$201,238.09.
Monthly(I+p) = $840.99.
Escrow = 232.78
Total = $1073.77.
Increase = 1073.77 - 984.68 = $89.09.
So the answer would be to be able to pay 89.09 more a month.
Make a 5% offer on a Volkswagen New Beetle that has a sticker price of $22,120 and a dealer cost of $20,868
To answer the questions, we need to calculate the monthly payment needed to pay off the loan in 20 years instead of 25, and compare it to your current monthly payment. We also need to consider whether refinancing the loan would be more or less reasonable.
1. To calculate the monthly payment needed to pay off the loan in 20 years instead of 25, we can use the loan balance and the new term. The formula to calculate the monthly payment for a fixed-rate loan is:
Monthly Payment = (Loan Amount * Interest Rate) / (1 - (1 + Interest Rate) ^ - Total Months)
For your original loan, we had:
Loan Amount = $136,000
Interest Rate = 5.6% per year (convert to decimal by dividing by 100: 0.056)
Total Months = 25 years * 12 months/year = 300 months
Using these values, the original monthly payment was:
Monthly Payment = ($136,000 * 0.056) / (1 - (1 + 0.056) ^ -300) = $751.90
To calculate the new monthly payment for a 20-year term, we change the Total Months value to 20 years * 12 months/year = 240 months and use the same Loan Amount and Interest Rate.
New Monthly Payment = ($136,000 * 0.056) / (1 - (1 + 0.056) ^ -240)
The difference in monthly payment will be:
Difference = New Monthly Payment - Current Monthly Payment
This will give us the additional money needed per month to pay off the loan in 20 years instead of 25.
Is this reasonable? This will depend on your current financial situation and your ability to generate the additional income. It's important to evaluate your income, expenses, and other financial responsibilities to determine if you can afford the increased monthly payment.
2. To determine if refinancing is more or less reasonable, we need to compare the costs and benefits. Refinancing the loan involves obtaining a new loan with different terms, including a new interest rate.
In order to assess the impact of refinancing, we need to compare the total costs of your current loan for the remaining term of 20 years with the total costs of a refinanced loan.
Factors to consider when refinancing:
- The new loan's interest rate: Get quotes for new interest rates and compare them with your current rate of 5.6%.
- The closing costs: Consider the cost of refinancing, which typically involves closing costs that can amount to a couple of thousand dollars.
By comparing the total costs, which will include the monthly payments and the closing costs, you can determine if refinancing would save you money in the long run or if it would be more expensive.
It's important to weigh the potential monthly savings from a lower interest rate against the upfront closing costs, as well as the impact of extending the loan term to thirty years, which could result in paying more interest overall.
Ultimately, the reasonableness of refinancing depends on various factors such as the difference in interest rates, closing costs, your financial goals, and how long you plan to stay in the house. It's advisable to consult with a financial advisor or mortgage professional who can help you assess the potential benefits and costs of refinancing in your specific situation.