Question
A borrower got a mortgage 5 years ago for $750,000 at 7% interest for 30 years with no prepayment penalties or closing costs. The borrower
A borrower got a mortgage 5 years ago for $750,000 at 7% interest for 30 years with no prepayment penalties or closing costs. The borrower just got a call from her friendly mortgage broker suggesting she refinance into an 5/1 ARM (for the first 5 years the interest rate is fixed and then will adjust annually for the next 25 years and is indexed to one-year Treasury yields with a 8% margin). The 5/1 ARM has teaser rate of 4%, a fully adjusted rate of 11%, and closing costs of $5,000. The borrower plans to move to Sarasota, FL (and must pay off any mortgages she has) when she retires in 4 years.
Should she do the refinance -- use the IRR & NPV (assume discount rate or opportunity cost of capital of 4%) criteria to make the decision?
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