Tom got a 30 year fully amortizing FRM for $500,000 at 8%, with constant monthly payments. After 3 years of payments rates fall and he can get a 27-year FRM at 5%, but he must pay 7 points and $20000 in closing costs to get the new loan. Think of the refinancing decision as an investment for Tom, he pays a fee now but saves money in the future in the form of lower payments. What is the IRR of refinancing for Tom assuming he stays until maturity? In previous question, what is the IRR of refinancing for Tom assuming he prepays the new loan 5 years after refinancing? (Clarification: Tom will prepay the new loan 3+5=8 years after the house is purchased)

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
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Tom got a 30 year fully amortizing FRM for $500,000 at
8%, with constant monthly payments. After 3 years of
payments rates fall and he can get a 27-year FRM at
5%, but he must pay 7 points and $20000 in closing
costs to get the new loan. Think of the refinancing
decision as an investment for Tom, he pays a fee now
but saves money in the future in the form of lower
payments. What is the IRR of refinancing for Tom
assuming he stays until maturity?
In previous question, what is the IRR of refinancing for
Tom assuming he prepays the new loan 5 years after
refinancing? (Clarification: Tom will prepay the new loan
3+5=8 years after the house is purchased)

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