Run the numbers worksheet, "When You should Refinance Your mortgage" on page 285. Show the numbers at each line. Use 3% for the investment return. Advise Layla on whether she should refinance.

g It is sometimes advantageous to refinance an existing mortgage when interestrates decline. In mortgage refinancing, a I new mortgage is obtained to pay 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 I wise choice. The original mortgage for $160,000 was: obtained seven years ago at a 5.5 . 2 percent interest rate' for.30 years. The monthly payment is $908. After seven years, the "- 0 " 'N (\"'55 _ . principal owed has declined to $142,100. If interest rates for new mortgages have declined to 4.5' percent, the owner could . b A; take out a. new mortgage at the lower rate for a monthly payment of $827. Borrowing $142,100 for 23 years at 4.5 percent ' saves approximately $81 per month ($908 $827). However, refinancing may have some up-front costs, including a possible prepayment penalty on the old mortgage and closing costs for the new mortgage. [The question then becomes, will these costs exceed the monthly savings gained with a lower payment? The following worksheet provides a means for estimating 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 renancing (line 8). The homeowner would need to estimate the number'of months he or she expects to own the home after refinancing. 'Given an estimate of four years in this example. the net savings would be $977 (subtracting line B from line 5), and refinancing would benefit the owner. In this example, planning to live in the home only three more years would result in it not being financially advantageous to refinance. A similar worksheet can be found at www.bankrate.comlcalcuIatorslmortggi_geslrefinanoecalculatonasx