Question
You are advising a young couple, Mr. and Mrs. Smith, regarding a fixed-rate mortgage they have on their first home. They are unsure what would
You are advising a young couple, Mr. and Mrs. Smith, regarding a fixed-rate mortgage they have on their first home. They are unsure what would be financially better for them to do. Since they first bought their home, interest rates have declined and they are now both working. They believe that there are two options available to them:
1. Increase their monthly payment so that they would end up paying for their loan faster,
2. Refinance their current mortgage at currently lower interest rates.
Mr. and Mrs. Smith bought their first home 13 years ago. At that time the purchase price was $425,000. They put a down payment of 10% and financed the rest with a 30-year fixed-rate mortgage at 6.825%, compounded monthly.
Part C. Now consider refinancing the loan. Current interest rate for a 15-year fixed-rate mortgage is 4.25%. What would be the financial implications of refinancing their loan? Assume that the cost of refinancing is $2,250. This refinance cost is a one-time charge to pay for recording and attorney fees. Should Mr. and Mrs. Smith refinance their current loan? What are the financial advantages or disadvantages of refinancing?
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