Five years ago, you bought a house for $151,000. You had 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: $112,247.47
Then, answer these questions:
1.How much additional money would be needed to add to the monthly payment to pay off the loan in 20 years instead of 25? If you currently meet the monthly expenses with less than $100 left over, would it be reasonable to do this?
2. 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. What is the highest interest rate you could refinance at in order to do this. Determine the interest rate that would require a monthly total payment that is less than your current total payment. Also, refinancing costs you a couple of thousand dollars up front in closing costs.
To answer the first question, here's how you can calculate the additional monthly payment needed to pay off the loan in 20 years instead of 25:
Step 1: Calculate the number of months remaining on the original loan:
Number of months remaining = (25 years - 5 years) x 12 months/year = 240 months - 60 months = 180 months.
Step 2: Calculate the new monthly payment for a 20-year loan:
New monthly payment = Current loan balance / number of months remaining = $112,247.47 / 180 = $623.60 (approx.)
Step 3: Calculate the additional money needed to add to the monthly payment:
Additional money needed = New monthly payment - Current Principle and Interest payment = $623.60 - $706.12 = -$82.52.
Based on the calculations, you would need to add an additional $82.52 to your monthly payment to pay off the loan in 20 years instead of 25. However, since the result is negative, it means the new monthly payment is lower than the current principle and interest payment. This suggests that there may be an error in the given numbers or the calculations.
Regarding whether it would be reasonable to make this additional payment, it ultimately depends on your financial situation. If you currently have less than $100 left over after meeting your monthly expenses, adding an extra $82.52 may significantly impact your budget. It would be advisable to carefully consider your financial goals and commitments before committing to a higher monthly payment.
To answer the second question and determine the highest interest rate at which you could refinance to pay off the loan in 20 years, while maintaining a monthly total payment lower than the current total payment, follow these steps:
Step 1: Calculate the new monthly principle and interest payment for a 20-year loan with the current loan balance:
New monthly P&I payment = Current loan balance x (interest rate / 12) / (1 - (1 + interest rate / 12)^(-number of months remaining)).
Using a trial and error approach, you can try different interest rates to find the one that results in a new monthly P&I payment lower than $706.12.
Step 2: Once you find an interest rate that meets the criteria, calculate the total payment for the 20-year loan:
New monthly total payment = New monthly P&I payment + Escrow payment.
Step 3: Calculate the difference in total payment compared to the current total payment:
Difference in total payment = Current total payment - New monthly total payment.
Comparing the difference in total payment with the closing costs of refinancing will determine if it's worth refinancing.