The following question has some factual information (loan rates) and some made up (loan amount) information. You may use the spreadsheet titled Amortization Loan Bonus to help you with the calculations.

When I moved to Harrisonburg in 2007, the home loan rates were 6% (true). Assume that I purchased a home for $500,000 (false) and financed it for 30 years / 360 months (true). There are usually closing costs (title searches, loan origination fees, recording fees, loan processing fees, etc. mostly true) that equal about 1% of the cost of the loan. Assume that I paid for the closing costs (about $5,000) when I purchased the home and that for the next 5 years (60 months) I paid down about $34,728 of principle with my monthly loan payments ($2,998 recall that payment has both principle and interest) to a new principle balance of $465,272.

1. After 5 years of loan payments, I noticed that the Fed dropped the interest rates and I could now refinance my loan at 4.5%. When you refinance your loan, you pay off the old loan and take out a new loan and often times have the 1% closing cost fee again so my fee to refinance would be about 1% X loan balance of $465,272 = $4,652 (approximately).

2. Assuming that I pay the loan fee when I refinance and my new loan balance is $465,272. Should I refinance?

3.How long (in months) will it take me to recover the loan fee ($4,652) if I keep the same number of remaining months (25 years X 12 months)?

How much are my new monthly payments? Answer: $________

4.How much did the new rate (4.5%) lower my monthly payments?

Answer: $_______ (Old Payment $2,998 new monthly payment)

5. How long (in months rounded to 1 decimal place for example 27.3) will it take me to recover the 1% loan closing cost of $4,652?

Answer: _____ months (show your work).

6.If I decided to leave my payment amount at $2,998 with the new loan (since I was used to paying that much), how many months could I shorten the loan by?

Answer: (300 months new month calculation = months shortened) _______

7.Ask your parents if they have a home loan what the rate is and have they refinanced since rates are low might be worth investigating. I convinced several individuals to refinance and I refinanced twice since 2007 from 6% down to 4.5% and then again to 3.25%). It cost me thousands of dollars in loan costs, but I usually included that in the new loans and the savings paid for it (true).