Question

Your mortgage is a 30-year fixed at 8% on $150,000. You are considering refinancing at 3.5% fixed for 30 years. The bank charges you 1.5% of your debt in closing fees. Approximately how long will it take you to recoup the closing fees from the reduced loan payment amount?
a) 4 months
b) 15 months
c) 2 years
d) 30 years

Answer 1

Answer:

Option A,4 months

Explanation:

Closing fees =1.5% of the mortgage

mortgage amount is $150,000

closing fees =$150,000*1.5%=$2250

The mortgage monthly payment can be computed using the pmt formula in excel as follows:

=pmt(rate,nper,-pv,fv)

rate is the rate per month which is 3.5%/12=0.002916667

nper is 30 years multiplied by 12 =360

pv is the amount of mortgage which is $150,000

fv is the sum of the interest on mortgage and mortgage amount which is unknown

=pmt(0.002916667 ,360,-150000,0)= 673.57  

the final answer=closing fees/monthly payment=$2250 /$673.57  = 3.34  months

The closest option is 4 months

Answer 2

Answer:

The answer is a) 4 months.

Explanation:

I just got this question earlier and the answer is A. I tried the same strategy as the one above and it works. The answer is 4 months since 3.34 is close to 4 months.

Hope this helps!!