Assignment 2: Financial Project
Coming up with a plan to eliminate five years off of a home loan, in my opinion, the first thing to do is verify where you are on the schedule, and change one variable to measure its effect. The variable to be changed would be reducing the remaining amount of time on your loan from 25 years to 20. Next I would gather all the specific information on my loan, then change the amount of time left on my loan and determine the monthly principal and interest payment. The loan was originally for $141,000. The interest rate was 5.75% fixed. The principal and interest payment is $822.84. After sixty payments the remaining ...view middle of the document...
75/12= the monthly interest cost, and $130,794.68 is the current principal.
This would leave less than $5.00 to manage its monthly spending. This would make paying off the mortgage five years faster a bad idea because of the normal everyday unexpected things that happen in life. In order to identify the highest interest rate you could refinance at in order to pay the current balance off in 20 years and determine the interest rate, to the nearest quarter point, that would require a monthly total payment that is less than your current total payment. The interest rate that you qualify for will depend, in part, on your credit rating. Also, refinancing costs you $2,000 up front in closing costs.
Next we solve for an interest rate that would allow us to lower the amount of time left on the loan 5 years. Our current mortgage principal is 130,794.68. Add the closing costs for a new loan of $132,794.68. It will amortize in 240 monthly payments, or 20 years. The principal and interest payment was $822.84, and the new payment must be less, so let’s use $822.83. The interest rate that reduces the mortgage payment, increases the loan principal $2,000 to $132,794.68 and extinguishes in 20 years is 4.257%.
If the credit allows a refinance at 4.257% with $2,000 in closing costs that can be rolled into the new loan, this does reduce the loan term. I still wouldn’t advise it, since their monthly expenses are so close to their monthly income. I would prefer that the refinance reduces the monthly payment, so the cash flow improves.