As a result of lower interest rates, you are considering refinancing your mortgage. The existing mortgage has a 12 percent interest rate. The balance owed is $50,000, and the remaining term is 18 years, and your annual payment (i.e., interest plus principal) is

$6,897. A bank is willing to lend you the money at 10 percent to retire the old loan.

The term of the new loan will be 18 years, so you are not increasing the number of years required to pay off the mortgage. (There is no reason why the number of years should be the same. If there is a reduction in your mortgage payment, you could restore the original payment and retire the loan quicker. Or you may increase the amount of the loan and use the additional funds to improve the property.) Unfortunately, the bank will charge you an application fee of $1,000 and an additional fee (points) equal to 2 percent of the amount of the mortgage. There will also be additional costs (e.g., court recording costs of the new mortgage) that are estimated to be $750. To help determine if it is profitable to refinance, answer the following questions.

a) What are the total expenses to obtain the new loan?

b) How much will you have to borrow to retire the loan when the refinancing expenses are included, and what will be the annual payment required by the new loan?

c) What is the difference between the annual payments under the new and the old mortgages? What is the implied course of action?