Question
Five years ago, you borrowed $100,000 to finance the purchase of a $120,000 house. The interest rate on the old mortgage is 10%. Payment terms
Five years ago, you borrowed $100,000 to finance the purchase of a $120,000 house. The interest rate on the old mortgage is 10%. Payment terms are being made monthly to amortize the loan over 30 years. You have found another lender who will refinance the current outstanding loan balance at 8% with monthly payments for 30 years. The new lender will charge two discount points on the loan. Other refinancing costs will equal $3,000. There are no prepayment penalties associated with either loan. You feel the appropriate opportunity cost to apply to this refinancing decision is 8%.
- What is the payment on the old loan?
- What is the current loan balance on the old loan (five years after origination)?
- What should the monthly payment on the new loan be?
- Should you refinance today if the new loan is expected to be outstanding for five years?
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