Five years ago, a borrower took a mortgage for $250,000 at 6.00%for 30 years, monthly payments. This mortgage has a prepayment penalty of3.50%of the outstanding balance at prepayment for thefirst 10 years of the mortgage. Currently, the market rate is 4.00%on 25-year mortgages and the lender will charge1.50%financing cost. There is no prepayment penalty for the new loan.The borrower's opportunity investment cost is 4.00%.

Each question is independent.

For a, b and c, the borrower is considering refinancing the payoff of the loan (remaining balance + prepayment penalty).

a. If the borrower plans to holdhis/hermortgage for the next 25 years, shouldthe borrowerrefinance? What is the NPVif the borrower refinances?

b. If the borrower plans to holdhis/hermortgageonlyforeightmore years, shouldthe borrowerrefinance? What is the NPVif the borrower refinances?

c. If the borrower plans to holdhis/hermortgageonlyfor10more years, shouldthe borrowerrefinance? What is the NPVif the borrower refinances?

d.Ifthe borrowerrefinances the amount of$300,000 and will hold the loan for the next 25 years,shouldthe borrowerrefinance? What is the NPV from the refinancing? Hint: $300,000 is new loan amount. The borrower will have left over (equity take out) after paying back the original loan.