REFINANCING MORTGAGE LOAN Refinancing Mortgage Loan

The Problem Making a choice between decreased term of the mortgage and refinance it at a lower rate?

At start of the Mortgage

House Price

151,000

Down payment %

30000

Original Principal

21,000

Number of Payments

360

Annual Interest Rate

5.75%

After 5 years

Escrow Payment

$211.13

Principal Payment

706.12

Total Payment

$917.25

Current Loan Balance

$112,247.47 Initial term of the mortgage is 30 years. We have to determine if it is possible that we decrease the term of the mortgage to 25 years after 5 years on mortgage has been passed, given that our client has only $100 leftover from monthly expenses. Moreover, we also have to determine if refinancing is a viable option along with decreased term of the loan.

Term of the year = 25 years

Time to maturity

20 years

Monthly Payment

?

Additional Payment

?

If:

Refinancing

Time to Maturity

20 years

New Rate

?

Cost Savings

?

The Approach

We will employ a mortgage calculator and comparator available online to undertake a scenario analysis. On the basis of the scenario analysis, we can easily show our results.

Adjusting the term of the mortgage

The client wishes to decrease the term of the mortgage. One way to do this is increase the principal payments by a certain amount so that it pays the whole principal back in shorter duration of time. There will be a tradeoff between higher principal payments and interest savings. Reducing the term of the loan will result interest savings for the client. The interest savings will equal to the amount of interest to be paid during the term of the mortgage that will be decreased. On the contrary, the client will have to agree to pay higher principal on a monthly basis during the remaining term of the mortgage. This will undoubtedly reduce the leftover amount of the client that he/she will have for the monthly expenses.

Refinancing

The client can also go for refinancing option along with choice of reduced term of the mortgage. Refinancing at lower interest rate ...