Question

I am thinking about refinancing my mortgage. My present balance is $95,000. It is a fifteen year mortgage that I have had for three years and the interest rate is 4.5%. I can refinance my mortgage with a new 15 year mortgage with a 3.5% interest rate with $2500 in closing costs and 1 point or a 3.7% rate with no points and $2500 in closing costs. If I roll the points and closing costs into the new mortgage, should I refinance? Please submit as an Excel spreadsheet.

Answer 1

Answer:

We calculate below:

Existing Monthly interest rate, effective monthly interest rates under both refinance options factoring into the points and closing costs as below:

Existing Mortgage: Interest rate Monthly Interest Rate 4.50% 0.3750% Refinance: Option 1: Current loan balance Interest rate Monthly Interest Rate Number of months $95,000 3.50% 0.2917% 180 $2,500 Closing cost Point Net Loan amount $91,550 Monthly Installment $679.14 Effective Monthly rate 0.3369% Option 2: Interest rate Monthly Interest Rate Number of months 3.70% 0.3083% 180 Closing cost Net Loan amount $2,500 $92,500 Monthly Installment $688.51 Effective Monthly rate 0.3410%

We observe effective monthly rate is lower under refinance option1.

Hence:

I should go refinance and take option 1 (3.5% interest rate with $2500 in closing costs and 1 point)

The above excel with 'show formula' is as below:

1 Existing Mortgage: Interest rate Monthly Interest Rate 0.045 =C2/12 5 Refinance: 6 Option 1: Current loan balance Interest rate Monthly Interest Rate Number of months 95000 0.035 =C8/12 =15*12 2500 Closing cost Point Net Loan amount =C7-C12-C7*C13% Monthly Installment =PMT(C9,010,-C7,0,0) Effective Monthly rate =(RATE(C10,016,-C14,0,0)) Option 2: Interest rate Monthly Interest Rate Number of months 0.037 =C21/12 =15*12 Closing cost Net Loan amount 2500 =C7-C25 =PMT(C22,023,-C7,0,0) Monthly Installment Effective Monthly rate =RATE(C23,028,-C26,0,0)