Five years ago you borrowed $100,000 from a bank to finance the purchase of a small commercial warehouse that you bought for $150,000. The old mortgage loan was a 30 year fixed rate mortgage with monthly payments and an interest rate of 8 percent. Another lender recently approached with an opportunity to refinance the current outstanding loan balance with a new 30 year fixed rate mortgage with monthly payments at an interest rate of 6 percent. The new lender will charge 2 discount point on the loan amount and other refinancing costs equal $3,000. There are no prepayment penalties and your discount rate is 6 percent.

a. What are the monthly payments on the old loan?

b. What is the current loan balance of the old loan (5 years after origination)?

c. What are the monthly payments on the new loan?

d. Should you refinance today if you expect to hold the property for the next 5 years, sell it at the end of the 5 years and use the sale proceeds to pay off the new loan? What if you hold the property for another 10 years, sell it and pay off the loan in 10 years?

e. How does the expected holding period affect your decision to refinance?