Question

Carol has had a $145,000 fixed-rate mortgage for 5 years at 6.25% and is considering refinancing. She can now get an 80/20 mortgage with 4.5% and 9.5% interest, respectively. Based only on this information, should she refinance?

Answer 1

Carol must analyze the total costs of the current mortgage versus the proposed 80/20 refinance option, including all associated fees and closing costs, to determine if refinancing is beneficial given the mixed interest rates of 4.5% and 9.5%.

Step-by-step explanation:

Carol is considering whether to refinance her existing fixed-rate mortgage of $145,000 at 6.25% with an 80/20 mortgage with rates of 4.5% and 9.5%, respectively. Refinancing to a lower interest rate can often save a homeowner money on their monthly payments and total interest paid over the life of the loan. However, with an 80/20 mortgage, Carol would be splitting the mortgage into two parts: one at a lower rate of 4.5% and the other at a significantly higher rate of 9.5%. Even though the rate on the majority of the loan is lower, the high rate on the smaller portion of the loan could potentially outweigh the benefits, especially when considering total interest over the life of the loan. A detailed analysis comparing the total costs of the current mortgage versus the proposed 80/20 refinance option, including all fees and closing costs associated with refinancing, would be needed to make an informed decision.