Mortgage Refinancing Math: Break-Even, Points, Cash-Out & ARMs

What you'll build

What you will be able to do

Each lab ends with a concrete result that you build yourself and the checker confirms, cell by cell.

• Work out what the Reyeses still owe four years into their mortgage, how much principal they have repaid and how much of their payments went to interest.
• Price four refinance terms on the Reyeses' balance and see which ones really lower the payment and how many months each adds or cuts.
• Add up the Reyeses' refinance closing costs (leaving out what is not a cost), find the break-even month and the net saving if they move after five years.
• Compare four rate/point combinations on the same loan: what each costs up front, its payment, the break-even of buying a point and the cheapest offer over the Reyeses' stay.
• Compare the interest still to pay on the current loan with three refinance plans and see why a lower payment can save almost no interest.
• Size a cash-out refinance for the Reyeses, check it against the 80 % LTV limit and work out the effective interest rate they pay on the cash itself.
• Run a 5/1 ARM offer through five yearly resets on a hypothetical stress path, apply the 2/2/5 caps and the floor, recompute the payment each year, find where the lifetime cap bites and chart the payment shock.
• Rank four refinance offers by net present value over the Reyeses' seven-year stay, counting the discounted payment savings, the balance left at sale and the upfront costs, then chart the result.