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 of 3.50% of the outstanding balance at prepayment for the first 10 years of the mortgage. Currently, the market rate is 4.00 % on 25- year mortgages and the lender will charge 1.50% 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 hold his/her mortgage for the next 25 years, should the borrower refinance? What is the NPV if the borrower refinances? b. If the borrower plans to hold his/her mortgage only for eight more years, should the borrower refinance? What is the NPV if the borrower refinances? c. If the borrower plans to hold his/her mortgage only for 10 more years, should the borrower refinance? What is the NPV if the borrower refinances? d. If the borrower refinances the amount of $300,000 and will hold the loan for the next 25 years, should the borrower refinance? 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. 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 of 3.50% of the outstanding balance at prepayment for the first 10 years of the mortgage. Currently, the market rate is 4.00 % on 25- year mortgages and the lender will charge 1.50% 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 hold his/her mortgage for the next 25 years, should the borrower refinance? What is the NPV if the borrower refinances? b. If the borrower plans to hold his/her mortgage only for eight more years, should the borrower refinance? What is the NPV if the borrower refinances? c. If the borrower plans to hold his/her mortgage only for 10 more years, should the borrower refinance? What is the NPV if the borrower refinances? d. If the borrower refinances the amount of $300,000 and will hold the loan for the next 25 years, should the borrower refinance? 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
