Question
A borrower got a mortgage loan 5 years ago for $250,000 at 6% interest for 30 years with $2,500 in closing costs. The borrower just
A borrower got a mortgage loan 5 years ago for $250,000 at 6% interest for 30 years with $2,500 in closing costs.
The borrower just got a call from her friendly mortgage broker suggesting she refinance into a 20 year 5/1 ARM (for the first 5 years the interest rate is fixed and then will adjust annually for the next 15 years). The 5/1 ARM has an initial rate of 5.00%, an index based on one-year Treasury yields, a margin of 3%, and closing costs of $1,500.
The borrower will retire and move to Key West, FL in 3 years & has a discount rate of 5.00%. Assume that all fees are paid with cash (they are not financed).
- Should she do the refinance? Provide Evidence using NPV & IRR criteria.
- In excel use the NPV function to graph out an NPV profile from a 0% discount rate to a 50 % discount rate. The graph must look nice with titles, labels, & nicely spaced markers on each axis. Paste this figure as a picture into your word file. The Y-axis is NPV in dollars and X-axis is the discount rate. Please see the example posted.
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