Answer to Question #170973 in Financial Math for Thamar

Question

Refinancing

Since interest rates have dropped, you consider refinancing your mortgage at a lower 6% rate.

If you took out a new 30-year mortgage at 6% for your remaining loan balance, what would your new monthly payments be?

How much interest will you pay over the life of the new loan?

Analyzing the refinance

Notice that if you refinance, you are going to be making payments on your home for another 30 years. In addition to the 10 years you've already been paying, that's 40 years total.

How much will you save each month because of the lower monthly payment?

How much total interest will you be paying (consider the interest you paid over the first 10 years of your original loan as well as interest on your refinanced loan)

Now the non-computational question: Does it make sense to refinance? (there isn't a correct answer to this question. Just give your opinion and your reason)

Answer 1

Refinancing

New monthly payments=D_n/{1-(1+i)^^-n/i}

where D_n is the remaining debt

New monthly payments =D_n/{1-(1+0.06)^^-30/0.06}

= D_n /2.9

New interest ,i_new=6%

Yes it makes sense to refinance because the new interest is lower than the initial interest