Loan Refinancing Problem

00:00 16 marks

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Isabelle takes out a loan of $250,000 to buy an apartment. The loan is for 20 years and the nominal annual interest rate is 3.8%, compounded monthly. Isabelle makes fixed monthly payments at the end of each month.

(a) (i) Calculate the fixed monthly payment Isabelle needs to make.
(ii) Calculate the total amount Isabelle will pay back over the 20 years. [5 marks]

After 5 years, Isabelle decides to refinance the loan. The remaining balance will be paid off over a new period of 10 years with a new nominal annual interest rate of 3.5%, compounded monthly. She will continue to make fixed monthly payments.

(b) Calculate the remaining balance on the original loan after 5 years (60 payments). [3 marks]
(c) Calculate the new fixed monthly payment for the refinanced loan. [3 marks]
(d) Calculate the total amount Isabelle will save by refinancing the loan compared to staying with the original loan terms. Give your answer to the nearest dollar. [5 marks]

Part a

8 minutes 5 marks

Question

(i) Calculate the fixed monthly payment Isabelle needs to make.
(ii) Calculate the total amount Isabelle will pay back over the 20 years. [5 marks]



Hint Hint

Hint

Use the annuity formula with monthly compounding; convert annual interest rate to monthly.

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Complete Answer

(i) ≈ $1489.66; (ii) ≈ $357518.40

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Part b

5 minutes 3 marks

Question

Calculate the remaining balance on the original loan after 5 years (60 payments). [3 marks]



Hint Hint

Hint

Recalculate the outstanding balance using the TVM formulas after 60 payments.

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Complete Answer

≈ $203118.53

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Part c

4 minutes 3 marks

Question

Calculate the new fixed monthly payment for the refinanced loan. [3 marks]



Hint Hint

Hint

Apply the annuity formula with the new balance as the principal, using the new rate of 3.5% per annum compounded monthly over 120 months.

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Complete Answer

≈ $1983.77

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Part d

7 minutes 5 marks

Question

Calculate the total amount Isabelle will save by refinancing the loan compared to staying with the original loan terms. Give your answer to the nearest dollar. [5 marks]



Hint Hint

Hint

Determine the total payment over the life of the loan under both scenarios and subtract the refinanced total from the original total.

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Complete Answer

≈ $30086

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