A few years back, Dave and Jana bought a new home. They borrowed $230,415 at an annual fixed rate of 5.49% (15-year term) with monthly payments of $1,881.46. They just made their 40th payment, and the current balance on the loan is $208,555.87. Interest rates are at an all-time low, and Dave and Jana are thinking of refinancing to a new 15-year fixed loan. Their bank has made the following offer: 15-year term, 3.0%, plus out-of-pocket costs of $2,937. The out-of-pocket costs must be paid in full at the time of refinancing. Build a spreadsheet model to evaluate this offer. The Excel function: =PMT(rate, nper, pv, fv, type) calculates the payment for a loan based on constant payments and a constant interest rate. The arguments of this function are: rate = the interest rate for the loan nper = the total number of payments pv = present value (the amount borrowed) fv = future value [the desired cash balance after the last payment (usually 0)] type = payment type (0 = end of period, 1 = beginning of the period) For example, for Dave and Jana's original loan, there will be 180 payments (12*15 = 180), so we would use =PMT(0.0549/12, 180, 230415,0,0) = $1,881.46. Note that because payments are made monthly, the annual interest rate must be expressed as a monthly rate. Also, for payment calculations, we assume that the payment is made at the end of the month. The savings from refinancing occur over time, and therefore need to be discounted back to current dollars. The formula for converting K dollars saved t months from now to current dollars is: K (1+r)t-1 where r is the monthly inflation rate. Assume that r = 0.002 and that Dave and Jana make their payment at the end of each month. Use your model to calculate the savings in current dollars associated with the refinanced loan versus staying with the original loan. If required, round your answer to the nearest whole dollar amount. If your answer is negative use "minus sign".

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
icon
Related questions
Question
A few years back, Dave and Jana bought a new home. They borrowed $230,415 at an annual fixed rate of 5.49% (15-year term) with monthly
payments of $1,881.46. They just made their 40th payment, and the current balance on the loan is $208,555.87.
Interest rates are at an all-time low, and Dave and Jana are thinking of refinancing to a new 15-year fixed loan. Their bank has made the
following offer: 15-year term, 3.0%, plus out-of-pocket costs of $2,937. The out-of-pocket costs must be paid in full at the time of refinancing.
Build a spreadsheet model to evaluate this offer. The Excel function:
=PMT(rate, nper, pv, fv, type)
calculates the payment for a loan based on constant payments and a constant interest rate. The arguments of this function are:
rate = the interest rate for the loan
nper = the total number of payments
pv = present value (the amount borrowed)
fv
future value [the desired cash balance after the last payment (usually 0)]
type = payment type (0 = end of period, 1 =
beginning of the period)
For example, for Dave and Jana's original loan, there will be 180 payments (12*15 = 180), so we would use =PMT(0.0549/12, 180, 230415,0,0)
= $1,881.46. Note that because payments are made monthly, the annual interest rate must be expressed as a monthly rate. Also, for payment
calculations, we assume that the payment is made at the end of the month.
The savings from refinancing occur over time, and therefore need to be discounted back to current dollars. The formula for converting K dollars
saved t months from now to current dollars is:
K
(1+r)*-1
where r is the monthly inflation rate. Assume thatr = 0.002 and that Dave and Jana make their payment at the end of each month.
Use your model to calculate the savings in current dollars associated with the refinanced loan versus staying with the original loan.
If required, round your answer to the nearest whole dollar amount. If your answer is negative use "minus sign".
Transcribed Image Text:A few years back, Dave and Jana bought a new home. They borrowed $230,415 at an annual fixed rate of 5.49% (15-year term) with monthly payments of $1,881.46. They just made their 40th payment, and the current balance on the loan is $208,555.87. Interest rates are at an all-time low, and Dave and Jana are thinking of refinancing to a new 15-year fixed loan. Their bank has made the following offer: 15-year term, 3.0%, plus out-of-pocket costs of $2,937. The out-of-pocket costs must be paid in full at the time of refinancing. Build a spreadsheet model to evaluate this offer. The Excel function: =PMT(rate, nper, pv, fv, type) calculates the payment for a loan based on constant payments and a constant interest rate. The arguments of this function are: rate = the interest rate for the loan nper = the total number of payments pv = present value (the amount borrowed) fv future value [the desired cash balance after the last payment (usually 0)] type = payment type (0 = end of period, 1 = beginning of the period) For example, for Dave and Jana's original loan, there will be 180 payments (12*15 = 180), so we would use =PMT(0.0549/12, 180, 230415,0,0) = $1,881.46. Note that because payments are made monthly, the annual interest rate must be expressed as a monthly rate. Also, for payment calculations, we assume that the payment is made at the end of the month. The savings from refinancing occur over time, and therefore need to be discounted back to current dollars. The formula for converting K dollars saved t months from now to current dollars is: K (1+r)*-1 where r is the monthly inflation rate. Assume thatr = 0.002 and that Dave and Jana make their payment at the end of each month. Use your model to calculate the savings in current dollars associated with the refinanced loan versus staying with the original loan. If required, round your answer to the nearest whole dollar amount. If your answer is negative use "minus sign".
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps with 2 images

Blurred answer
Knowledge Booster
Cost of Credit
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education