4. Refinancing a Mortgage. Kevin Tutumbo of Terre Haute, Indiana, has owned his home for 15 years and expects to live in it for a least five more. He originally borrowed $135,000 at 6 percent interest for 30 years to buy the home. He still owes $96,000 on the loan. Interest rates have since fallen to 4.5 percent, and Kevin is considering re- financing the loan for 15 years. He would have to pay 2 points on the new loan with DO IT IN CLASS no prepayment penalty on the current loan. Page 289 (a) What is Kevin's current monthly payment? (b) Calculate the monthly payment on the new loan. (c) Advise Kevin on whether he should refinance his mortgage using the Run the Numbers worksheet, When You Should Refinance Your Mortgage on page 289. CHAPTER 9 Obtaining Affordable Housing 289 RUN THE NUMBERS When You Should Refinance Your Mortgage It is sometimes advantageous to refinance an existing geous to refinance an existing mortgage when interest rates decline. In mortgage refinancing a new mortgage is obtained to off and replace an existing mortgage Most often it is undertaken to lower the monthly payment on the home by taking out a new loan with a lower interest rate The example here illustrates how to determine whether refinancing your mortgage is a wise choice. The original mortgage for $160,000 was obtained seven years ago at a 5.5 percent interest rate for 30 years. The monthly pay mentis 5908. After seven years, the principal owed has declined to $142,100. If interest rates for new mortgages have declined to 45 percent the owner could take out a now mortgage at the lower rate for a monthly payment of 5827. Borrowing $142,100 for 23 years at 45 percent Saves approximately $81 per month (5908 - 5827). How ever, refinancing may have some up-front costs, including a possible prepayment penalty on the old mort- gage and closing costs for the new mortgage The question then becomes, will these costs exceed the monthly savings gained with a TIN CLASS lower payment? The following worksheet provides a means for estimat ing whether refinancing offers an advantage. It compares the future value of the reduced monthly payments (line 5) with the future value of the money used to pay the up-front costs (estimated here at 2%) of refinancing line 8). The homeowner would need to estimate the number of months he or she ex- pects to own the home after refinancing Given an estimate of four years in this example, the net savings would be 5977 sub tracting line 8 from line 51 and refinancing would benefit the ownerIn this example, planning to live in the home only three more years would result in it not being financially advantageous to re to refinance Asimilar worksheet can be found at www bankrate.com/calculator mortgage refinance calculator.aspx Your Figures Example 5908 827 4,175 Decision Factors 1. Current monthly payment 2. New monthly payment 3. Monthly savings (line 1 - line 2) 4. Additional years you expect to live in the house 5. Future value of an account balance after 4 years if the monthly savings were invested at 3% after takes using the calculator on the Garman Forgue companion website) 6. Prepayment penalty on current loan (0%) 7. Points and fees for new loan (2%) 8. Future value of an account balance after 4 years of the prepayment penalty and dosing costs ($4,263) had been invested instead at 3% after taxes curing the calculator on the Garman/Forgue companion website) 9. Niet saving after 48 months (line 5 - line 87 2,842 3,198 5977 It may also be possible to borrow more than the current balance owed on the existing loan, thereby utilizing some of the equity built up in the home Borrowers refinancing for more than the amount owed should understand that rebuilding the equity to its previous level may take many years. This also is dangerous because if home prices decline the borrower will owe more on the home than it is worth CONCEPT CHECK 9.4 1. Explain why the portions of a monthly mortgage payment that are allocated toward interest and toward principal will vary as the loan is repaid. 2. Distinguish between a conventional mortgage loan and an adjustable-rate loan 3. Identify the two ways that homebuyers build equity in their property 4. Refinancing a Mortgage. Kevin Tutumbo of Terre Haute, Indiana, has owned his home for 15 years and expects to live in it for a least five more. He originally borrowed $135,000 at 6 percent interest for 30 years to buy the home. He still owes $96,000 on the loan. Interest rates have since fallen to 4.5 percent, and Kevin is considering re- financing the loan for 15 years. He would have to pay 2 points on the new loan with DO IT IN CLASS no prepayment penalty on the current loan. Page 289 (a) What is Kevin's current monthly payment? (b) Calculate the monthly payment on the new loan. (c) Advise Kevin on whether he should refinance his mortgage using the Run the Numbers worksheet, When You Should Refinance Your Mortgage on page 289. CHAPTER 9 Obtaining Affordable Housing 289 RUN THE NUMBERS When You Should Refinance Your Mortgage It is sometimes advantageous to refinance an existing geous to refinance an existing mortgage when interest rates decline. In mortgage refinancing a new mortgage is obtained to off and replace an existing mortgage Most often it is undertaken to lower the monthly payment on the home by taking out a new loan with a lower interest rate The example here illustrates how to determine whether refinancing your mortgage is a wise choice. The original mortgage for $160,000 was obtained seven years ago at a 5.5 percent interest rate for 30 years. The monthly pay mentis 5908. After seven years, the principal owed has declined to $142,100. If interest rates for new mortgages have declined to 45 percent the owner could take out a now mortgage at the lower rate for a monthly payment of 5827. Borrowing $142,100 for 23 years at 45 percent Saves approximately $81 per month (5908 - 5827). How ever, refinancing may have some up-front costs, including a possible prepayment penalty on the old mort- gage and closing costs for the new mortgage The question then becomes, will these costs exceed the monthly savings gained with a TIN CLASS lower payment? The following worksheet provides a means for estimat ing whether refinancing offers an advantage. It compares the future value of the reduced monthly payments (line 5) with the future value of the money used to pay the up-front costs (estimated here at 2%) of refinancing line 8). The homeowner would need to estimate the number of months he or she ex- pects to own the home after refinancing Given an estimate of four years in this example, the net savings would be 5977 sub tracting line 8 from line 51 and refinancing would benefit the ownerIn this example, planning to live in the home only three more years would result in it not being financially advantageous to re to refinance Asimilar worksheet can be found at www bankrate.com/calculator mortgage refinance calculator.aspx Your Figures Example 5908 827 4,175 Decision Factors 1. Current monthly payment 2. New monthly payment 3. Monthly savings (line 1 - line 2) 4. Additional years you expect to live in the house 5. Future value of an account balance after 4 years if the monthly savings were invested at 3% after takes using the calculator on the Garman Forgue companion website) 6. Prepayment penalty on current loan (0%) 7. Points and fees for new loan (2%) 8. Future value of an account balance after 4 years of the prepayment penalty and dosing costs ($4,263) had been invested instead at 3% after taxes curing the calculator on the Garman/Forgue companion website) 9. Niet saving after 48 months (line 5 - line 87 2,842 3,198 5977 It may also be possible to borrow more than the current balance owed on the existing loan, thereby utilizing some of the equity built up in the home Borrowers refinancing for more than the amount owed should understand that rebuilding the equity to its previous level may take many years. This also is dangerous because if home prices decline the borrower will owe more on the home than it is worth CONCEPT CHECK 9.4 1. Explain why the portions of a monthly mortgage payment that are allocated toward interest and toward principal will vary as the loan is repaid. 2. Distinguish between a conventional mortgage loan and an adjustable-rate loan 3. Identify the two ways that homebuyers build equity in their property