Question

A homeowner took out a 20-year fixed-rate mortgage of $70,000. The mortgage was taken out 13 years ago at a rate of 7.45 percent. If the homeowner refinances, the charges will be $1,500. What is the highest interest rate at which it would be beneficial to refinance the mortgage? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

APR % ____

Answer 1

Given, additional charges if re-financed is $ 1500. Hence, it makes all sense to go for re-finance only if the savings in interest cost would be 1500.

Given 7 years more before repayment of loan in full.

Interest amount to be payable for the balance period of 7 years = 70000 * 7.45%*7 = 36505.

Therefore the highest interest amount at which the refinance looks practicable = 36505 - 1500 -1 ( The assumption behind 1 is that to opt for refinance, it should be beneficial than current scheme, and not equal. If both are equal, even in that scenario, it does not make sense to shift to another new refinance sheme).

Maximum interest possible = 35004. If expressed as a % , = 35004 / 70000 / 7 * 100 = 7.14%