The Problem Making a choice between decreased term of the mortgage and refinance it at a lower rate?
At start of the Mortgage
House Price
151,000
Down payment %
30000
Original Principal
21,000
Number of Payments
360
Annual Interest Rate
5.75%
After 5 years
Escrow Payment
$211.13
Principal Payment
706.12
Total Payment
$917.25
Current Loan Balance
$112,247.47 Initial term of the mortgage is 30 years. We have to determine if it is possible that we decrease the term of the mortgage to 25 years after 5 years on mortgage has been passed, given that our client has only $100 leftover from monthly expenses. Moreover, we also have to determine if refinancing is a viable option along with decreased term of the loan.
Term of the year = 25 years
Time to maturity
20 years
Monthly Payment
?
Additional Payment
?
If:
Refinancing
Time to Maturity
20 years
New Rate
?
Cost Savings
?
The Approach
We will employ a mortgage calculator and comparator available online to undertake a scenario analysis. On the basis of the scenario analysis, we can easily show our results.
Adjusting the term of the mortgage
The client wishes to decrease the term of the mortgage. One way to do this is increase the principal payments by a certain amount so that it pays the whole principal back in shorter duration of time. There will be a tradeoff between higher principal payments and interest savings. Reducing the term of the loan will result interest savings for the client. The interest savings will equal to the amount of interest to be paid during the term of the mortgage that will be decreased. On the contrary, the client will have to agree to pay higher principal on a monthly basis during the remaining term of the mortgage. This will undoubtedly reduce the leftover amount of the client that he/she will have for the monthly expenses.
Refinancing
The client can also go for refinancing option along with choice of reduced term of the mortgage. Refinancing at lower interest rate ...