What is the value of the savings today

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You have a mortgage on your existing home. The mortgage payments are $2,046.73 per month (Note: this amount covers principal and interest only, and ignores property taxes and insurance payments.) You have lived in the house for 5 years, and the original mortgage was a 30-year fixed rate mortgage. The interest rate on the mortgage is 3.25% per year, compounded monthly. The next mortgage payment is one month away.

Problem 1: Interest rates have declined, so that you can take out a new mortgage at 2.875% per year, compounded monthly. You do not wish to extend the maturity of your mortgage; any new mortgage would have a maturity of 25 years. What is the new monthly payment on such a mortgage?

Problem 2: What is the value of the savings today, if you switch to the new mortgage?

Reference no: EM132790214

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