Question
Five years ago a borrower incurred a mortgage for $80,000 at 10% for 30 years, monthly payments. Currently the market rate is 8% on 25-year
Five years ago a borrower incurred a mortgage for $80,000 at 10% for 30 years, monthly
payments. Currently the market rate is 8% on 25-year mortgages. The existing mortgage has a
prepayment penalty of 5% of the outstanding balance and the lender will charge 4% closing cost
on a new loan.
a. If the borrower plans to hold either mortgage for the next 25 years, should they
refinance?
b. If the borrower plans to hold either mortgage for 8 more years only, should they
refinance?
c. If the new loan term is 30 years and the borrower plans to hold it until the end, should
they refinance?
d. If the new loan term is 15 years and the borrower plans to hold it until the end, should
they refinance?
Use both methods (with and without discounting) to calculate total savings.
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