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Five years ago, you bought a house for $151,000.

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Five years ago, you bought a house for $151,000. You had a down payment of $30,000, which meant you took out a loan for $121,000. Your interest rate was $5.75% fixed. You would like to pay more on your loan. You check your bank statement and find the following information.

Escrow payment: $211.13
Principle and Interest payment: $706.12
Total payment: $917.25
Current Loan balance: $112,247.47

1. How much additional money would be needed to add to the monthly payment to pay off the loan in 20 years instead of 25? If you currently meet the monthly expenses with less than $100 left over, would it be reasonable to do this?

2. It might be possible to pay the current balance off in 20 years if you refinanced the loan at a lower interest rate. The interest rate that you qualify for will depend in part on your credit rating. What is the highest interest rate you could refinance at in order to do this? Determine the interest rate that would require a monthly total payment that is less than your current total payment. Also, refinancing costs you a couple of thousand dollars up front in closing costs.

The escrow info, principal loan balance etc. is given information. I am not for sure which principal formula to use to figure this question out. Please help.

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Solution Preview

The first thing that I should point out is that when you do an amortization table (attached to this) on the original loan it should be $112,242.25 for the current loan balance and not $112,247.47 (a difference of $5.22).

1. The extra payment needed per month when only using two decimal places is $81.92. This actually gives an over payment of $3.97 on the final payment so the final payment would only need have an extra $77.95. Another way to do this would be to get an extra number with more than two decimal places; but it is not likely that you will be able to pay something like $81.914 extra dollars ...