Refinancing a Loan

Project #4 – Refinancing a Loan
Background
As contributors to the economy, by earning and spending money, it is important that we understand the math
behind borrowing and repaying a loan. In this project we will explore the process of refinancing as a means to
save money on interest.
Instructions
Work through the questions in this packet. Show all work in a clear and organized manner. Attach additional
pages if necessary.
Assignment
Picture yourself in the future. You’ve earned your degree and graduated from college (woot!). You’ve been
working for a few years at a stable job, putting aside money every month for retirement and your savings
account. You’re at a point in your life where you are ready to make a big financial purchase, you’re ready to
buy a home!
1. Using www.bankrate.com, determine the best available mortgage rate in your city (enter your zip code)
for a 30 year mortgage on a $650,000 home with a 15% down payment. You may assume a credit
score of 740+. Select the best rate (not APR) from your search results and record below.
Rate:_______________
2. Using the rate from above, determine your monthly mortgage payments Monthly Payment:__________________
3. Congratulations, you’re a homeowner! You’ve purchased your home and have lived there for 5 years
and 6 months. Every month you make your monthly payment and things are going well for you. Even
better, the economy has changed and now interest rates are lower than they were when you purchased
the home so you decide to refinance.
Determine the unpaid balance on your mortgage at this point in time. This will be the amount you need
to borrow when you refinance your mortgage.
Unpaid Balance: ____________________
4. Interest rates have decreased by 10%. What is your new interest rate?
○ Be careful, this is a percentage decrease. You should not just subtract 10 or 0.10 from your
previous rate.
New Rate:__________________
5. You decide to refinance your loan and take out a 15 year mortgage at the new interest rate. How much
is your new monthly payment?
New Monthly Payment: _______________________
6. How much have you saved in interest by refinancing your mortgage? Be careful, your original loan had
more than 15 years remaining but your new loan has only 15 years remaining.
Savings:______________________ 7. We will now verify your results using an online Amortization Calculator. Return to www.bankrate.com,
and select Amortization Calculator under the Mortgages heading.
Enter the amount, time, and rate for the original loan to begin with and click CALCULATE. Your
monthly payments will appear on the side. Click Show Amortization Schedule to see the month-to-
month breakdown of your loan payments over the entire term of the loan.
○ What is your monthly payment?
Monthly Payment: ________________________
This should match your answer from #2.
○ Using the Balance column from the Amortization Schedule, what is your unpaid balance after 5
years and 6 months?
Unpaid Balance: _______________________
This should match your answer from #3.
c. Enter the information for your new loan (after refinancing) using the Unpaid Balance you found
above for the Mortgage Amount for a 15 year loan at the new interest rate you found in #4. Click
CALCULATE. What is your new monthly payment?
Monthly Payment: _______________________
This should match your answer from #5.
d. Using your answers from (a) and (c) above, determine how much you will save by refinancing your mortgage. Savings:________________________
This should match your answer from #6.