Consider the purchase of your first house. Say it costs $100,000. You plan to put 20% down to avoid the extra fees associated with PMI (private mortgage insurance). Your finance the remaining 80% through your bank with a 30 year loan at 6%.
a) What is your monthly payment?
b) After 2 years (24 payments), interest rates go down. How much do you need to refinance to pay off the original loan? In other words, what is the balance of your original loan after the 24th payment?
c) Independent of your answer in ‘b,’ assume you still wish to refinance 80% of the original $100,000. You can either pay the re-financing fees totaling $1,200 and get a 30 year 5% loan, or pay an additional 1% of your loan (plus the $1,200 refinancing fees) and get a rate of 4.625%. What is the payback period for each of these options, relative to not financing?