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Martha and John recently purchased their first home for $800,000. They made a 20% down payment and mortgaged the rest. They agreed to a five-year

Martha and John recently purchased their first home for $800,000. They made a 20% down payment and mortgaged the rest. They agreed to a five-year fixed term mortgage amortized over 25 years at 3% per year. Assume interest rates are lowered to 2.5% at the end of the second year of the term. If they break their term agreement and take advantage of the lower rate, they will be required to pay an interest penalty equal to 3 months of interest.

Required: Should they refinance the mortgage? Explain why or why not.

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