Part 1: The Sampsons A Continuing Case

When the Sampsons purchased their home, they obtained a 30-year mortgage with a fixed interest rate of 6%. Their monthly mortgage payment (excluding property taxes

and insurance) is about $780 per month. Today, they could refinance to a 30-year mortgage with an interest rate of 5%. Dave and Sharon want to determine how much they can lower their monthly payments by if they refinance. If they refinance their home, they would incur transaction fees of $3,500. The Sampsons take the standard deduction on their personal income tax return, so the potential tax benefits of mortgage interest are irrelevant here.

Use a website or your financial calculator to determine the monthly mortgage payment (excluding property taxes and insurance) on a $130,000 mortgage if the Sampsons refinance to the new mortgage at the 5% interest rate:

Mortgage loan (PV)	$130,000
Interest rate (divide this annual rate by 12 to input I in the financial calculator)	5%
Years (multiply this number by 12 months to get total N to input into the financial calculator).	30
New mortgage payment (I calculated for you: PV=$130,000, N=360, I/Y=0.41667 payment of $697.87/month	$697.87

The Sampsons expect that they will not move for at least three years. Advise them on whether they should refinance their mortgage by comparing the savings of refinancing with the costs:

Current mortgage payment	$780
New mortgage payment (from calculation above)
Monthly savings (difference between current and new payment)
Annual savings
Years in house after refinancing	3 years
Total savings over the 3 years

Based on the above, 1) what is your advice to the Sampsons regarding refinancing their loan? (Support your advice by incorporating the results from your analysis above into your answer). And 2) why might your advice about refinancing change in the future?