Use Worksheet 5.4. Lin Wong purchased a condominium 4 years ago for $180,000, paying $1,250 per month on her $162,000, 8%, 25-year mortgage. The current loan balance is $152,401. Recently, interest rates dropped sharply, causing Lin to consider refinancing her condo at the prevailing rate of 6%. She expects to remain in the condo for at least 4 more years and has found a lender that will make a 6%, 21-year, $152,401 loan requiring monthly payments of $1,065. Although there is no prepayment penalty on her current mortgage, Lin will have to pay $1,500 in closing costs on the new mortgage. She is in the 15% tax bracket. Based on this information, use the mortgage refinancing analysis form in Worksheet 5.4 to determine whether she should refinance her mortgage under the specified terms.

Worksheet 5.4

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MORTGAGE REFINANCING ANALYSIS Name Ray and Carmen D'Angelo Item Description Date October 8, 2011 Amount 1 Current monthly payment (Terms: $80,000, 8%, 30 years) 2 3 New monthly payment (Terms: $70,180,5%, 20 years) Monthly savings, pretax (Item 1 - Item 2) 4 Tax on monthly savings [Item 3 x tax rate (25%)] 5 6 Monthly savings, after-tax (Item 3 - Item 4) Costs to refinance: a. Prepayment penalty $ 587 463 $124 31 $ 93 7 b. Total closing costs (after-tax) c. Total refinancing costs (Item 6a+ Item 6b) Months to break even (Item 6c+ Item 5) 2,400 $2,400 26