Question

Part 2. Deciding on Refinancing Changing interest rates create opportunities for home owners to gain advantage by refinancing their homes. For this part of the assessment, use the following scenario to consider this issue.

Imagine you have a $100,000 mortgage. Your current loan is at 7 percent with 14 years left, negotiated one year ago and involving $2,000 in closing costs.

You are considering refinancing at 5.5 percent for 15 years.

The closing costs would be $1,500.

Complete a 1–2 page evaluation of the refinancing possibility. Would you decide to refinance? Why or why not? What qualitative considerations would you consider in your decision to refinance or not refinance? Provide examples of calculations you would use to help you make your decision. In addition, use at least two resources to support your ideas.

Answer 1

Solution:

Evaluating the Refinancing Possibility and deciding to Refinance and Determining the Qualititative Considerations that you consider in your Decision to Refinance or Refinance:

The Following is the Qualitatitve Considerations for Refinancing:

1. Amount to be repaid must be reduced.
2. Rate of Interest of payback is reduced.
3. Closing costs are saved.
4. The pay back period is reduced.

where,

P = Principal amount

I = Interest rate divided by hundred

N = Number of years

where,

P = Principal amount

I = Interest rate divided by hundred

N = Number of years

Therefore, the Amount to be repaid in refinance scenario is $1,84,000

Yes, refinancing is the better option, because the closing costs are reduced and the amount to be repaid is less though one year is extended as per current scenario but all others constraints hold good.