Suppose that five years ago you took a mortgage loan for $160,000 at 7.750% for 30 years, monthly

payments. This loan has a prepayment penalty of 5% of the outstanding balance for the first six years of

life. The market rate on new mortgages now is 6.00%. Lenders are charging 6% financing costs on new

loans. Your opportunity cost is 6.00%.

1. If you plan to hold the loan to maturity (whether refinancing takes place or not), should you

refinance if you want to refinance the payoff of the existing loan for the remaining term of the

existing loan?

2.

Should you refinance if you wish to refinance the payoff of the existing loan for 15 years?

Assume that the contract rate on the new loan remains at 6.00% and the loan is held to maturity.