134k views
1 vote
The interest rate on an existing loan is 8.5% but a new loan can be obtained at 7.65%. If the effective cost of refinancing is 9.11%, is refinancing desirable?

User Qi Tang
by
7.9k points

1 Answer

6 votes

Final answer:

To determine if refinancing is desirable, compare the potential savings from the lower interest rate with the effective cost of refinancing. If the potential savings are less than the effective cost, refinancing may not be desirable.

Step-by-step explanation:

To determine if refinancing is desirable, we need to compare the effective cost of refinancing with the potential savings from the lower interest rate.

Let's assume the original loan amount is $10,000 and the remaining term is 5 years. The annual interest cost of the existing loan is 8.5% x $10,000 = $850.

If we refinance the loan at 7.65% interest rate, the new annual interest cost would be 7.65% x $10,000 = $765.

However, the effective cost of refinancing is 9.11%, which means there are additional fees and charges involved.

To determine if refinancing is desirable, we need to calculate the potential savings from the lower interest rate: $850 - $765 = $85.

If the potential savings from refinancing ($85) is less than the effective cost of refinancing, then it may not be desirable to refinance. In this case, $85 < 9.11%, so refinancing may not be desirable.

User Richard Dalton
by
7.6k points