An investor obtained a fully amortizing mortgage five years ago for $95,000 at 11% for 30 years. Mortgage rates have dropped so that a fully amortizing 25-year loan can be obtained at 10%. There is no prepayment penalty on the mortgage balance of the original loan, but three points will be charged on the new loan and other closing costs will be $2,000. All payments are monthly.

a)

What is the effective rate of return of refinancing? Assume that the investor borrows only an amount equal to the outstanding balance on the loan.

b)

What is the effective cost of refinancing?

c)Now assume the investor will only hold the property for 5 more years after refinancing. What will the rate of return be for refinancing?

d)

Now assume the investor will only hold the property for 5 more years after refinancing. What will the effective cost be for refinancing?