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A few years back, Dave and Jana bought a new home. They borrowed $ 2 3 0 , 4 1 5 at an annual fixed
A few years back, Dave and Jana bought a new home. They borrowed $ at an annual fixed rate of year term with monthly payments of $ They just made their th payment, and the current balance on the loan is $
Interest rates are at an alltime low, and Dave and Jana are thinking of refinancing to a new year fixed loan. Their bank has made the following offer: year term, plus outofpocket costs of $ The outofpocket costs must be paid in full at the time of refinancing.
Build a spreadsheet model to evaluate this offer. The Excel function
PMTrate nper, pv fv type
calculates the payment for a loan based on constant payments and a constant interest rate. The arguments of this function are as follows.
rate the interest rate for the loan
nper the total number of payments
pv present value the amount borrowed
fv future value the desired cash balance after the last payment usually
type payment type end of period, beginning of the period
For example, for Dave and Jana's original loan, there will be payments so we would use PMT $ Note that because payments are made monthly, the annual interest rate must be expressed as a monthly rate. Also, for payment calculations, we assume that the payment is made at the end of the month.
The savings from refinancing occur over time, and therefore need to be discounted back to current dollars. The formula for converting K dollars saved t months from now to current dollars is
K
rt
where r is the monthly inflation rate. Assume that
r
and that Dave and Jana make their payment at the end of each month.
Use your model to calculate the savings in current dollars associated with the refinanced loan versus staying with the original loan. Round your answer the nearest cent.
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