Actuarial Science 2053 Chapter Notes - Chapter 5: Refinancing, Interest Rate, Ung County
20 Jan 2016
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It is common practice to refinance a long- term loan before it is fully paid back. A 25 year mortgage for ,000 with monthly payments is taken out at an interest rate of j2 = 10%, guaranteed for 5 years. After 5 years, rates have fallen and the mortgage is refinanced at j2 = 8% for another 5 years. Paying off a loan early (before the end of the guarantee period) -- common penalties. Penalty = (outstanding loan balance) x ird x (term remaining in payment periods) Often, the financial institution will calculate the ird using the interest rate they currently offer on an n-year loan, where n = term remaining, rounded to the nearest year. Note once the penalty is calculated, it is then added to the outstanding balance and the new periodic payment is calculated based on this new balance.
