Ole and Lena own a home. They have a mortgage balance of $100,000. The interest rate they are paying is 6%. Recent action by the Federal Reserve has caused mortgage rates to decrease substantially. Ole and Lena are thinking about refinancing. Here are the details they must consider in order to make a good decision:

	Current Loan	Proposed Loan
Balance	$100,000	$100,000
Interest Rate	6%	4%
Term	25 years (300 months)	25 years (300 months)
Refinancing costs	0	$5,000
Current CD rates	N/A	2%

Will it be in Ole and Lenas best interests to refinance? There are 3 potential ways to look at the problem. Two methods require you to determine the difference in the payment amounts; then:

1. You can calculate the present value of the payment difference and determine if it exceeds $5,000 (using the 2% CD rate as your discount rate)
2. You could calculate the future value of the difference in payments and calculate the future value of $5,000. Compare those two (once again using the 2% CD rate)

Youll obviously come up with very different dollar amounts after performing each of the above but the answer to the question will be the same.

The third way to consider the question is to ask what the outcome might be if Ole and Lena added the $5,000 to the new mortgage loan. They will borrow $105,000. Then you can simply compare the payments. This is perhaps the easiest way. It could reveal a different answer (I dont think it will) because the additional $5,000 is subject to a 4% rate as opposed to the 2% rate.

Please solve the questions above. Show your work to the extent possible, by that I mean show what the respective payments are and what present values you obtain, etc. I dont want to know each keystroke on your calculator.