Question

Dave takes out a 29-year mortgage of 240000 dollars for his new house. Dave gets an interest rate of 13.2 percent compounded monthly. He agrees to make equal monthly payments, the first coming in one month. After making the 65th payment, Dave wants to buy a boat, so he wants to refinance his house to reduce his monthly payment by 700 dollars, and to get a better interest rate. In particular, he negotiates a new rate of 7.2 percent compounded monthly, and agrees to make equal monthly payments (each 700 dollars less than his original payments) for as long as necessary, followed by a single smaller payment. How large will Dave's final loan payment be?

Answer 1

First let's calculate EMI on home loan, so put following in your financial calculator.

N= 348 (29*12)

i = 1.1 (13.2/12)

PV = 240,000

FV = 0 (as at end no loan is left)

solve for PMT it will be 2,700

So EMI will be 2,700 $

Now on 65th Payment he decides to refinance the loan, So let's calculate Outstanding after 65th Installment

Go to Amortization Function (it will be written as AMORT Function)

P1 = 65

P2 = 65 (to go after 65th payment)

Solve for balance (BAL), You will get 234,350 as balance

So refinancing is require for TOTAL AMOUNT $. 234,350

Now again put following values in your calculator

i = 0.6 (new rate 7.2/12)

PV = 234350

PMT = -2000 (2700 he was paying earlier and he want 700 less now so 2700-700= 2000)(Must put minus sign as it is payment)

FV= 0

and now solve for N, you will get 203 as answer.

so new loan will last 203 months, (or about 16.9 years)