You have been living in the house you bought 10 years ago for $500,000. At that time, you took out a loan for 80% of the house at a fixed rate 30-year loan at an annual stated rate of 6%. You have just paid off the 120th monthly payment. Interest rates have meanwhile dropped steadily to 5.50% per year, and you think it is finally time to refinance the remaining balance. But there is a catch. The total fee to refinance your loan is $15,000, when you include all the various costs of refinancing. Should you refinance the remaining balance for the remaining 20 years? How much would you save/lose if you decided to refinance?
10
yes, 13891
To determine whether you should refinance and how much you would save or lose, we need to compare the costs and savings associated with the two different loan scenarios: your current loan and the refinanced loan.
First, let's calculate the remaining balance on your current loan after 10 years of payments. Since you initially took out a loan for 80% of the house's value, the loan amount would be $500,000 * 80% = $400,000.
Now, to find the remaining balance after 120 monthly payments, we need to calculate the outstanding loan balance with the help of an amortization schedule. The remaining balance would depend on the specific terms of your loan, including the interest rate, loan term, and the payment schedule. Let's calculate it:
Loan amount: $400,000
Loan term: 30 years (360 months)
Annual interest rate: 6%
Using an amortization calculator or spreadsheet, we find that after 120 monthly payments of $2,398.20 each, the remaining balance on your current loan would be approximately $324,520.28.
Next, let's calculate the new monthly payment and remaining term for the refinanced loan.
Loan amount: $324,520.28 (remaining balance)
Loan term: 20 years (240 months)
Annual interest rate: 5.50%
Using the same amortization calculator or spreadsheet, we find that the new monthly payment for the refinanced loan would be $2,303.13.
Now, let's compare the costs and savings.
1. Total interest paid:
- Current loan: With the remaining balance of $324,520.28 and the current loan's interest rate of 6%, the total interest paid over the remaining term would be $183,964.68.
- Refinanced loan: With the new loan amount of $324,520.28 and the new loan's interest rate of 5.50%, the total interest paid over the 20-year term would be $123,352.81.
The savings in interest payments would be $183,964.68 - $123,352.81 = $60,611.87.
2. Refinancing costs:
- Refinancing fee: $15,000
To determine whether you should refinance, you should consider how long you plan to stay in the house. If you plan to stay long enough to recoup the refinancing costs and benefit from the savings in interest payments, then refinancing could be a good option.
To calculate the breakeven point, divide the refinancing costs by the monthly interest savings: $15,000 / ($2,398.20 - $2,303.13) = 16.61 months.
If you plan to stay in the house for more than 16.61 months, you would save money by refinancing.
In summary, if you decide to refinance the remaining balance for 20 years at an interest rate of 5.50%, you would save approximately $60,611.87 in interest payments over the remaining term of the loan. However, it would take around 16.61 months to recoup the refinancing costs of $15,000.