Libardo Pacheco

Professor: Suzanne Mozdy

Math 1030

Should I refinance my current Mortgage?

I purchased my home in December of 2009. My original principle balance was
$145,579.00. My current principle balance is $131,672.10. The loan is a 30 year,
4.5% fixed interest rate. I pay about $947.00 a month. $737.63 of that amount goes
toward the principle and interest. The other $210.00 is my escrow that goes towards
my insurance and property taxes. I will focus on the principle and interest, since I
cant really change the escrow much. I have paid about $47,061.00 since the start
of my loan. My principle balance has only gone down $13,906.90 so that means that
I have paid $33,154.10 of just interest.
Prior to this project, I have never really analyzed my mortgage. Even when I
first purchased the home all I really worried about was making sure the monthly
payment was going to be within my budget. I dont plan on living in this house for
the full 30 year term of the mortgage. I plan on staying in the home at least another
5 years and then possibly selling. I will compare what my principle balance will be
after 5 years if I continue to pay the regular monthly payment of $737.63 versus the
balance in five years if I refinance and pay 100.00 extra a month.
I have done most of my banking over the last 15 years with Cyprus Credit
Union so I figured they would be the best place to start to get some information.
The rates were at 3.75% fixed interest on a 30 year mortgage. They estimated I
would need to start with a loan of $135,000.00 since I would be including the
closing costs in the new loan. With the following calculations my monthly payment
for principle and interest ends up being $625.21.
P = L[c(1 + c)n]/[(1 + c)n - 1]
P = Monthly Payment
n = month when balance is paid in full
L = loan amount
c = monthly interest or yearly interest divided by 12 months
$625.21 = $135000[.003125(1 + .003125)360]/[(1 + .003125)360 - 1]
$737.63 - $625.21 = $112.42

$112.42 is how much less I would pay every month if I refinanced, but of
course I would be starting the 30 year mortgage again and that means I would be
paying until 2045 which is 6 more years than where I currently stand.
Since I am paying $112.42 less, I could easily add $100.00 extra a month
towards the principle. With that $100.00 extra payment each month I would pay the
mortgage off 7 years earlier and that is actually 1 year earlier than if I continue with
my current loan.
In 5 years my principle balance will be $115,991.47 with my current
mortgage and $114,650.51 if I refinance at 3.75% interest and pay an extra
$100.00 a month. I used the following formula to find out that balance after 5 years.
B = L[(1 + c)n - (1 + c)p]/[(1 + c)n - 1]
B = remaining loan balance
p = number of months from start of loan
n = month when balance is paid in full
L = loan amount
c = monthly interest or yearly interest divided by 12 months
Current Mortgage in 5 years
$115,991.47 = $145,579.00[(1 + .00375)360 - (1 + .00375)122]/[(1 + .00375)360 - 1]
I know thats a lot of numbers, but its kind of necessary for this type of
problem. I used 122 months for p because I have already completed 62 months in
my current mortgage and I added another 60 months to find out where the principle
balance would be 5 years from today.
The difference between refinancing with an extra $100.00 payment every
month and keeping my existing loan is honestly not that much. I will have it paid off
about 1 year earlier if I refinance and even with the extra $100.00 payment, my
monthly payment is about $12.00 less than what I currently pay.
Without math it would be impossible to make this comparison and make an
educated decision. Being able to solve a personal real world problem like this makes
me feel really good. I could enter all of this information into a mortgage calculator
online and get the same results, but I wouldnt truly understand how I got the
results or the role that math has in the problem. This was a really straight forward
logical math project that I chose, because I was really considering it.
I did choose to refinance my home in real life. Since my mortgage is an FHA
loan I currently have to pay a mortgage insurance that is about an extra $60.00 a

month. By refinancing as a conventional mortgage I will see a few benefits. I will no

longer have to pay the mortgage insurance, just my home owners insurance, so
that saves me about $60.00 a month. I also chose to get about $4000.00 cash out
to pay off my wifes car. With the cash out the interest went from 3.75% to 3.875%
and my principle balance will begin at $139,000.00. The monthly payment
difference is about $30.00. I will still be able to pay an extra $100.00 every month
and my early pay off will only be about 2 months after my original early pay off
without the cash out and the lower interest. All of these refinance numbers were
with the assumption that my house would appraise with a value of at least
$165,000.00, because it has to be below an 80% loan to value of the home. The
appraisal report came in yesterday and it appraised at $174,000.00, so that allowed
us to go with the option to get the extra cash out. I signed some papers earlier
today and locked the rate in at 3.875%. I should be closing within the next two
weeks.
This is the second mortgage I have had, the first was a condo I bought a little
over 10 years ago. This is the first time I have really understood what I was doing
and how the amortization schedule works and the math behind it. Like myself 10
years ago, I think the majority of people that get a mortgage dont really
understand how it works and what a huge difference a little extra payment towards
the principle can make. Thanks to this class and the skills I have acquired during the
semester, I am confident that I made the best decision based on my budget and my
needs.