Question
A borrower got a mortgage loan 5 years ago for $375,000 at 6% interest for 30 years with no prepayment penalties or closing costs.
A borrower got a mortgage loan 5 years ago for $375,000 at 6% interest for 30 years with no prepayment penalties or closing costs. The borrower just got a call from his friendly mortgage broker suggesting he refinance into an 7/1 ARM (indexed to one-year Treasury yields with an 8% margin). The 7/1 ARM has teaser rate of 5%, a fully adjusted rate of 9%, and closing costs of $10,000. The borrower plans to move to Scottsdale, AZ when he retires in 6 years. When he moves he must payoff all outstanding mortgages. Should he do the refinance -- use the IRR & NPV (assume the discount rate or opportunity cost of capital of 5%) criteria to make the decision?
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