A household purchased a house 5 years ago for $450,000. The purchase was financed with a 30 year 4% Fixed Rate loan at an LTV of 90%. The household has the option of refinancing the outstanding principal with a 10 year 3% Adjustable Rate Mortgage Loan. What are the advantages and disadvantages to the refinancing alternative?

Present Value-Annuity: 1 PV = C r r(1+r)" Present Value: FV. PV = (1+r)" = FV [a+b)] 1 (1 + r)" Fully Amortizing Loan Repayments: PMT = P 1- 112 (1+2) FV P- Partial Amortizing Loan Repayments: PMT = 1 1 | 112 112(1+112 (1+ Partial Amortizing Loan Outstanding Balloon Payment: FV =, - P(1+i%2) + - PMT Definitions for mortgage formulas: PMT= monthly repayments, P= initial outstanding principal, FV = Balloon Balance, i= Nominal Annual Interest Rate, t = number of periods Present Value-Annuity: 1 PV = C r r(1+r)" Present Value: FV. PV = (1+r)" = FV [a+b)] 1 (1 + r)" Fully Amortizing Loan Repayments: PMT = P 1- 112 (1+2) FV P- Partial Amortizing Loan Repayments: PMT = 1 1 | 112 112(1+112 (1+ Partial Amortizing Loan Outstanding Balloon Payment: FV =, - P(1+i%2) + - PMT Definitions for mortgage formulas: PMT= monthly repayments, P= initial outstanding principal, FV = Balloon Balance, i= Nominal Annual Interest Rate, t = number of periods