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## What An Incredible Offer!

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**THE SCENARIO**
I recently got a letter from a lender, offering an *"incredible"* loan-refinance offer. Reading the details, I was floored, and soon you'll understand why.
The offer was to roll my recent balance of $320,447 into a new 30-year loan at a 4.875% interest rate. The 30-year loan this would replace started 6 years and 9 months ago, had an initial balance of $374,205, and an interest rate of 3.5%.
**The question:** If I take them up on their amazing refinance offer, *and there are no costs to doing the refinance**, how much money will I save over the life of the new loan versus my current loan?
* Note: This pretty much never happens.

**THE SOLUTION**
This one has several parts, but each of them is pretty straightforward.
**Step 1: New loan's payment**
N: 360 (The new loan is a 30-year loan, which lasts for 30 x 12 = 360 months)
I/YR: 4.875 (The new loan's rate is 4.875%)
PV: 320,447 (The lender wants to lend me $320,447)
PMT: (This is what I'm trying to find)
FV: 0 (The new loan amortizes fully)
**Step 2: Current loan's payment**
N: 360 (My current loan is a 30-year loan, which lasts for 30 x 12 = 360 months)
I/YR: 3.5 (My existing rate is 3.5%)
PV: 374,205 (My current lender originally loaned me $374,205)
PMT: (This is what I'm trying to find)
FV: 0 (The new loan amortizes fully)
**Step 3: Total payments for new loan**
The new loan has 360 payments yet to be paid, each being $1,695.83.
The total I'd pay on the new loan would be 360 x $1,695.83 = **610,499.48**.
**Step 4: Total payments for existing loan**
The new loan started with 360 payments yet to be paid, but that was 6 years and 9 months ago. 6 years is 6 x 12 = 72 months. 72 months + 9 months = 81 months elapsed.
So my current loan only has 360 - 81 = 279 months left to go.
The total I'd pay on my current loan (if I kept it instead of refinancing) would be 279 x $1,680.35 = **468,817.00**.
**Step 5: Calculate "incredible" savings!**
If I were to refinance, I'd save an "incredible" $468,817.00 - $610,499.48 = *negative* $141,682.48.
That's right, not only would I have to pay more every month, but I'd be done in 30 years instead of 23, meaning that the refinance, on top of costing me money on a monthly basis, would *also* cost me an extra $141,682.48 over the life of the loan.
It's tempting, but I think I'm going to have to pass on this one.

Note: You can use any financial calculator to do this problem, but if you want the BEST, you can
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- Find the monthly payment for the new loan
- Find the monthly payment for my current loan
- Find the total payments over the life of the new loan
- Find the total payments over the remaining life of my current loan
- Find out the amazing savings this offer represents!

The new loan's monthly payment would be **$1695.83**.

The monthly payment on the current loan is **$1680.35**.

What do you think? Am I missing something here? Have you gotten similar offers in the mail, and if so, were any of them actually worth doing? Let us know in the comments!