Five years ago you borrowed $200,000 to finance the purchase of a $240,000 house. The interest rate on the old mortgage is 6%. Payment terms are being made monthly to amortize the loan over 30 years. You have found another lender who will refinance the current outstanding loan balance at 4% with monthly payments for 25 years. The new lender will charge two discount points on the loan. Other refinancing costs will equal $6,000. There are no prepayment penalties associated with either loan. You feel the appropriate opportunity cost to apply to this refinancing decision is 4%. Assume you plan to stay in the house for 25 years, is the refinance worth it? What if you only plan to stay for an
Five years ago you borrowed $200,000 to finance the purchase of a $240,000 house. The interest rate on the old mortgage is 6%. Payment terms are being made monthly to amortize the loan over 30 years. You have found another lender who will refinance the current outstanding loan balance at 4% with monthly payments for 25 years. The new lender will charge two discount points on the loan. Other refinancing costs will equal $6,000. There are no prepayment penalties associated with either loan. You feel the appropriate
DO ON EXCEL
| Current loan payment | |
| Current loan balance after 5 years | |
| New loan payment | |
| Discount points | |
| Total refinance costs | |
| Payment savings | |
| Net benefit of refinance (25 years) | |
| Net benefit of refinance (5 years) | |
| NPV of refinance (5 years) | |
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
