Question
Imagine that John Dees own a piece of property. He is trying to determine whether to refinance the property so he can possible make a
Imagine that John Dees own a piece of property. He is trying to determine whether to refinance the property so he can possible make a higher return on other investment. Regardless of his decision, he plans to sell the property in 10 years.
Option A: keep the property, as well as the currently-existing financing in place. The property is expected to produce an 11.5% return over the next 10 years.
Option B: Refinance the property. Because John has owned the property for number of years, he has equity build-up embedded in the investment. The commercial building is currently appraised at value of $627,000. His current loan balance is $169,290. The monthly mortgage loan accrues interest at 6.35%. If John refinances the property to pull equity out, he estimates for the new Loan-to-value ratio to be 65%. Because interest rates related to properties with a risk profile similar to John's have increased in recent years, the new loan is estimated to accrue interest at 7.25%. Closing costs and bank fees are estimated to be 11,270. John estimates that by investing the equity that he would pull out of the property in a diversified portfolio of small-cap public stocks he can earn 11.3%.
Should John refinance? Please show all of your work.Please explain the rationale behind your decision
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