Clipboard fe David obtained a fully amortizing loan 8 years ago for $12,0000 at 8% for 30 years. Mortgage rates hav D BER Is refinancing a good idea? David obtained a fully amortizing loan 8 years ago for $12,0000 at 8% for 30 years. Mortgage rates have dropped in such a manner so as to provide a loan for 22 years at 6.5%. There is no prepayment penalty on the mortgage balance of the original loan, but 2 points will be charged on the new loan and other closing cost will be $3000. All payments are monthly. How much does David need to borrow if he decides to Prrow only outstanding loan balance? is refinancing a good option if David decides to repay the full amount of loan in 5 more years? How would your answer for part 2a change if David decides to borrow outstanding loan balance and other refinancing costs? Would your answer for part 2b change if David decides to keep the loan for full term of the loan?
Clipboard fe David obtained a fully amortizing loan 8 years ago for $12,0000 at 8% for 30 years. Mortgage rates hav D BER Is refinancing a good idea? David obtained a fully amortizing loan 8 years ago for $12,0000 at 8% for 30 years. Mortgage rates have dropped in such a manner so as to provide a loan for 22 years at 6.5%. There is no prepayment penalty on the mortgage balance of the original loan, but 2 points will be charged on the new loan and other closing cost will be $3000. All payments are monthly. How much does David need to borrow if he decides to Prrow only outstanding loan balance? is refinancing a good option if David decides to repay the full amount of loan in 5 more years? How would your answer for part 2a change if David decides to borrow outstanding loan balance and other refinancing costs? Would your answer for part 2b change if David decides to keep the loan for full term of the loan?
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
Related questions
Question
| David obtained a fully amortizing loan 8 years ago for $12,0000 at 8% for 30 years. Mortgage rates have dropped in such a manner so as to provide a loan for 22 years at 6.5%. There is no prepayment penalty on the mortgage balance of the original loan, but 2 points will be charged on the new loan and other closing cost will be $3000. All payments are monthly. |
| How much does David need to borrow if he decides to borrow only outstanding loan balance? |
| Is refinancing a good option if David decides to repay the full amount of loan in 5 more years? |
| How would your answer for part 2a change if David decides to borrow outstanding loan balance and other refinancing costs? |
| Would your answer for part 2b change if David decides to keep the loan for full term of the loan? |
Transcribed Image Text:### Is Refinancing a Good Idea?
**Scenario:**
- David obtained a fully amortizing loan 8 years ago for $120,000 at 8% interest for 30 years.
- Mortgage rates have now dropped, allowing for a new loan of 22 years at 6.5%.
- No prepayment penalty exists on the original loan balance.
- New loan involves 2 points, with closing costs totaling $3,000.
- Payments are made monthly.
### Questions:
**2a.** How much does David need to borrow if he decides to refinance only the outstanding loan balance?
**2b.** Is refinancing a good option if David plans to repay the full amount of the loan in 5 more years?
**2c.** How would your answer for part 2a change if David decides to borrow the outstanding loan balance along with other refinancing costs?
**2d.** Would your answer for part 2b change if David decides to keep the loan for the full term?
---
This exercise explores the concept of refinancing, its costs, and the financial implications over different time frames. Students should use the given data to perform calculations and determine the best financial decision for David.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps with 1 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education