An investor obtained a fully amortizing mortgage 5 years ago for $95,000 at 11% for 30 years. Mortgage rates have dropped, so that a similar 25-year loan can be obtained at 10%. There is no prepayment penalty on the original loan but 3 points and a $2,000 loan fee are charged on the new loan at origination.

An investor obtained a fully amortizing mortgage 5 years ago for $95,000 at 11% for 30 years. Mortgage rates have dropped, so that a similar 25-year loan can be obtained at 10%. There is no prepayment penalty on the original loan but 3 points and a $2,000 loan fee are charged on the new loan at origination.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Calculating the Return On A Loan

Question

Based on Scenario 2 above, what is the yield earned on the upfront refinancing costs if she plans
to own the property for only 5 more years?
-1.23%
-0.60%
0.98%
-1.64%
0.25%

Scenario 2
An investor obtained a fully amortizing mortgage 5 years ago for $95,000 at 11% for 30
years. Mortgage rates have dropped, so that a similar 25-year loan can be obtained at
10%. There is no prepayment penalty on the original loan but 3 points and a $2,000 loan fee are
charged on the new loan at origination.

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