Refer to the following for Exercises 27 and 28. When interest rates drop, it may become attractive to refinance your home. Refinancing means that you acquire a new mortgage to borrow the current principal due on your home and use the proceeds to pay off your old mortgage. You then begin a new 15- or 30-year mortgage at the new, lower interest rate. A second factor that reduces your monthly payment is that the equity you accumulated under the old mortgage reduces the amount that you have to borrow under the new mortgage. Suppose that you have been paying for 5 years on a 30-year mortgage for $200,000 with a fixed rate of 6%. Your monthly payment is $1199.10, and you have $13,890.81 in equity, so remains to be paid. We consider two refinancing offers.

Question 22.58

28. The second offer is on the Internet (from a company you have never heard of) for a 30-year, fixed-rate mortgage at 3.99% with closing costs of $5000.

  1. What is the new monthly payment?
  2. How much less is that per month than the old payment?
  3. How many months will it take for the savings in payments to make up for the additional closing costs?