Question
1. You are currently in the 7th year of a 25-year fixed rate, fully amortized mortgage with monthly payments. You originally borrowed $150,000 with a
1. You are currently in the 7th year of a 25-year fixed rate, fully amortized mortgage with monthly payments. You originally borrowed $150,000 with a 9.50% annual interest rate. Interest rates are expected to be lower, so you are considering the feasibility of refinancing the loan. To refinance, closing costs are expected to be 3.25% of the new loan amount. You will also have to pay 1 point. Assume no prepayment penalties both with the original and new loans.
A) Using a spreadsheet, calculate the new loan payments for every eighth of a percent from a revised interest rate of 7.5% to 8.5%. Assume you will refinance at the end of the 7th year of the mortgage with points and closing costs included in the new loan and you do not wish to extend the length of the mortgage beyond its current length (i.e. the maturity of the new loan is 18 years from now).
B) How low must interest rates go in order for you to breakeven? Using the =RATE function
C) Draw a graph to plot the new interest rate versus the new mortgage payment and show the breakeven point.
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