Ten years ago, Reem and Forsan took out a $150,000 mortgage to buy their new house. The mortgage was a 20-year, 10% mortgage with annual payments. Today their bank offers similar mortgages at 8% interest; however, when the young couple went to the bank to inquire about the possibility of refinancing the remainder of their mortgage with a 10-year, 8% mortgage, they were informed that the bank has a $15,000 “exit fee” for the refinancing.

a. Should they still refinance the mortgage?

b. what is the maximum “exit fee” they are willing to pay in order to refinance their mortgage?

c. Use Data Table functionality to illustrate how their decision would change as the exit fee and the interest rate on the new mortgage change. Please examine the exit fees ranging from $8000 to $15000 in increments of $1000 and the mortgage rate on the new mortgage ranging from 7% to 10.5% in increments of 0.5%.

(Hint: Use the exit fee or $15000 and the interest rate on the new mortgage of 8% to calculate the cost of the new mortgage. Compare it to the cost of the old mortgage. You might want to use Excel if function. That is, =if(cost of new mortgage>cost of old mortgage, “Don’t refinance”, “Refinance”). Then you can set up the data table and populate the decision of whether to refinance or not.)

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