Question

Assume that you chose the 80% LTV mortgage from the previous section, but after 10 years are thinking about refinancing for $2,500. You will only be in the home for another 5 years. The new loan would be an ARM. Interest rates on 20 -year ARMS are currently 6%. Interest rates are expected to increase to 8% in years 2 and 3 and then to 9% in years 4 and 5. - Find the return on your $2,500 refinancing cost. Should you refinance? - If interest rates rose faster than expected, how might this change your answer?

Answer 1

To determine the return on a $2,500 refinancing cost, compare the total savings of the new adjustable-rate mortgage (ARM) against the initial cost. If the savings exceed the cost, refinancing may be beneficial. However, if interest rates rise faster than expected, higher costs could negate the benefits of refinancing.

Step-by-step explanation:

Calculating the return on refinancing costs involves comparing the total savings from the new loan with the initial refinancing costs. To find the return on your $2,500 refinancing cost, you would need to calculate the total payment amount of both the principal and interest over the next 5 years with the new adjustable-rate mortgage (ARM) and compare it to what you would have paid with your original loan. If the total savings exceed $2,500, refinancing may be beneficial.

However, if interest rates rise faster than expected, this will affect your ARM by increasing your monthly payments and the total amount paid over the life of the loan. This could potentially make the refinancing option less attractive, as the higher than expected interest rates could diminish your savings or even make the new loan more costly than if you had stuck with the original loan.

In summary, to determine if refinancing is a good decision, one must analyze the forecasted interest rates, the current rates available, and the length of time you intend to stay in the home post-refinance. If there is uncertainty or if rates are anticipated to rise, the risks associated with an ARM could outweigh the initial savings on interest payments.

Answer 2

To find the return on your $2,500 refinancing cost, calculate the total payments for the current mortgage and the new ARM loan. If the difference is positive, refinancing is beneficial. If interest rates rise faster than expected, the return on refinancing cost may decrease.

Step-by-step explanation:

To find the return on your $2,500 refinancing cost, we need to compare the total savings from refinancing to the cost of refinancing. First, let's calculate the monthly payments for the new ARM loan. The loan amount will be the current mortgage balance minus the $2,500 refinancing cost. Using the interest rates provided, we can calculate the monthly payments for each year. Then, we sum up the total payments over the 5-year period for the new ARM loan. Next, we compare this total payment amount with the total payment amount for the current mortgage. The return on your refinancing cost can be calculated as the difference between the total payment amount of the current mortgage and the total payment amount of the new ARM loan. If this amount is positive, it means you will save money by refinancing, and if it is negative, it means the refinancing cost is not worth it.

If interest rates rose faster than expected, it would likely increase the total payment amount for the new ARM loan. This would decrease the return on your refinancing cost and may even result in a negative return. It's important to consider the potential impact of interest rate fluctuations on the overall cost of the new loan.