Question

FreddieMac reports that the average rate on a 30-year fixed rate mortgage is 3.92% as of January 2012. This is down from 4.76% in January 2011 and 5.03% in January 2010. If you have a $221,000, 5%, 30-year mortgage, how much interest will you save if you refinance your loan at 3.5% for 20 years? (Use 360 days a year. Round your answer to the nearest cent.)

Answer 1

N = 360, FV = 0, PV = 221,000, rate = 3.92%/12

use PMT function to find the monthy payments

monthly payment = 1044.9206

now calculate the value after 10 years

N = 120, PMT = -1044.9206, PV = 221,000, rate = 3.92%

use FV function in Excel

value of the loan after 10 years or when 20 years remain = 173,640.2664

now calculate the monthly payment when rate is 3.5%

N = 240, FV = 0, PV = 173,640.2664, rate = 3.5%/12

use PMT function to find the monthy payments

monthly payment = 1007.0436

savings in interest = (1044.9206 - 1007.0436)*240 = 9,090.48