Run the numbers worksheet, "When You should Refinance Your mortgage" on page 278. Show the numbers at each line. Use 3% for the investment return. Advise Layla on whether she should refinance.

258 PART ? Money Management DECISION - MAKING WORKSHEET When to Refinance a Mortgage comes whether these costs would more than offset the The example here illustrates how to monthly savings. determine whether mortgage refi- The following worksheet provides a means for nancing is wise. The original mort- estimating whether refinancing offers an advantage. It gage for $89,000 was obtained 10 years ago at an 11 percent interest compares the future value of the reduced monthly payments (line 5) with the future value of the money rate for 30 years. The monthly payment is $847.57. After 10 years, the principal owed has declined to used to pay the up-front costs of refinancing (line 8). $82, 113.67. If interest rates for new mortgages have The homeowner would need to estimate the number of declined to 9 percent, the owner could take out a new months he or she expects to own the home after refi- mortgage at the lower rate. Borrowing $82,113.67 for nancing. Given an estimate of four years in this exam- 20 years at 9 percent saves approximately $109 per ple, net savings would be $743 (subtracting line 8 month ($847.57 - $738.80). Note, however, that refi- from line 5), and it would appear that refinancing nancing brings up-front costs, including a possible would benefit the owner. A similar worksheet can be prepayment penalty on the old mortgage and closing found at http://partners financenter.com/consumer/ costs for the new mortgage. The question then be- all_homes fes. Decision Factor Example Your Figures 1. Current monthly payment 2. New monthly payment $ 848 3. Annual saving (line 1 - line 2 x 12) 739 4. Additional years you expect to live in the house 1308 5. Future value of an account balance after 4 years if the annual savings were invested at 3% after taxes (using Appendix A.3) 6. Prepayment penalty on current loan (if any) 7. Points and fees for new loan 5472 1000 8. Future value of an account balance after 4 years if the prepayment penalty and closing costs ($4200) had been invested instead 3200 at 3% after taxes (using Appendix A.1) 9. Net saving after 49 months (line 5 - line 8) 4729 $ 743 more than the amount owed should understand that rebuilding the equity to its vious level may take many years