Problem:

Five years ago you purchased a house from a Housing Project. The seller financed 105.000 TL on a 15-year fixed rate loan at 12% annually. The contract requires annual principal payments of 7.000 TL plus interest on the remaining balance (e.g. at the end of first year you paid principal of 7.000 TL and interest of 12.600 TL).

Five years have passed since the contract was signed, and interest rates have fallen. A local bank has agreed to make a new 10-year loan at annual 10% interest with equal annual repayments.

You are also informed that expenses associated with refinancing are as follows: Recording fee of 300 TL and loan origination fee of %2 of remaining principal of 70.000 TL (or 1400 TL). These expenses (total of 1.700 TL) need to be paid immediately when new agreement is signed.

Assume that after-tax discount rate or market interest rate for you is 9%. In other words, you should discount the cash outflows with 9%.

Given this information; you are asked to evaluate whether or not to refinance your loan. Calculate the parameters that help you to evaluate, show your work for both existing loan and refinancing loan, explain your logic, and discuss the results.

Hint: First, calculate cash flows for each option and then compare!