The LOAN Procedure

Example 17.2 Refinancing a Loan

Assume that you obtained a fixed rate 15-year loan in June 1995 for $78,500 with a nominal annual rate of 9%. By early 1998, the market offers a 6.5% interest rate, and you are considering whether to refinance your loan.

Use the following statements to find out the status of the loan on February 1998. Output 17.2.1 shows the results:

proc loan start=1995:6;
   fixed life=180 rate=9 amount=78500 noprint
         label='Original Loan';
   compare at=('10FEB1998'd);
run;

The monthly payment on the original loan is $796.20. The ending outstanding principal balance as of February is $71,028.75. At this point, you might want to refinance your loan with another 15-year loan. The alternate loan has a 6.5% nominal annual rate. The initialization costs are $1,419.00. Use the following statements to compare your alternatives:

proc loan start=1998:2 amount=71028.75;
   fixed rate=9 payment=796.20
         label='Keep the original loan' noprint;
   fixed life=180 rate=6.5 init=1419
         label='Refinance at 6.5%' noprint;
   compare at=(15 16) taxrate=33 marr=4 all;
run;

The comparison reports of May 1999 and June 1999 in Output 17.2.2 illustrate the break even between the two alternatives. If you intend to keep the loan through June 1999 or longer, your initialization costs for the refinancing are justified. The periodic payment of the refinanced loan is $618.74.