Question
Luis took a fixed-rate mortgage loan 5 years ago for $120,000 at 7% interest rate. The loan maturity is 15 years and the amortization period
Luis took a fixed-rate mortgage loan 5 years ago for $120,000 at 7% interest rate. The loan maturity is 15 years and the amortization period is also 15 years. Now, a new lender offers him aloan at 5% interest rate with loan maturity of 10 years. The new loan amount is $92,895, which is exactly the outstanding loan balance of the existing loan. The amortization period for the new loan is also 10 years. If Luis refinances the existing loan,a prepayment penalty of3% will be applied. Also, the new loanhas a loanfee of $3,000. If Luis plans to hold the new loan for 10 yearsand he hastopay the refinancing fees out ofhis pocket, what is the effective interest rate for the new loan?
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