You are buying a $350,000 home and are deciding between two fixed rate mortgage options. The 80% LTV option has an interest rate of 8% over 30 years. Assume that you chose the 80% LTV mortgage but after 10 years are thinking about refinancing for $2,500. You will only be in the home for another 5 years. The new loan would be an ARM. Interest rates on 20-year ARMS are currently 6%. Interest rates are expected to increase to 8% in years 2 and 3 and then to 9% in years 4 and 5.

Find the return on your $2,500 refinancing cost.

Should you refinance? If interest rates rose faster than expected, how might this change your answer?

How would larger than expected increases in interest rates impact the supply and demand for homes?

Please show work/calculations for the questions that require it. Thank you!