You k out a 30-year mortgage (monthly payments) for £130,000 at 8.90% and payment number 35 is due today. y
You took out a 30-year mortgage (monthly payments) for £130,000 at 8.90% and payment number 35 is due today. you are deciding whether you should refinance the outstanding principal by borrowing at today’s lower rate of 6.70% an amount that
pays off the old loan. the new loan is for 30 years as of today. the total fees for getting the new loan equal 3.1% of the borrowed principal, and you will pay the fees today with funds from your savings account.
precisely describe how the refinancing decision changes your cash flows.
Answer
The loan balance after the 35th payment is £127,115. the cost to refinance the loan is £127,115*.031 = £3,941. the current payments are £1,036.67/month. after refinancing, the payment is £820.25/month. on a cash flow basis, you will save £216/month (sweet!). when considering if refinancing is cost effective, i would use 2 methods: cash flow and total asset (i.e., consider the equity value of the home as an asset). using the total asset method, i estimate that it will take 6 years to recoup the closing costs of refinancing, therefore i would not refinance if i were moving within 6 years.
