A homeowner obtained a fully amortizing mortgage 5 years ago for $95.000 at 11 percent for 30 years. Mortgage rates have dropped, so that a fully amortizing 25-year loan can be obtained at 10 per- cent. There is no prepayment penalty on the mortgage balance of the original loan, but three points. will be charged on the new loan and other closing costs will be $2,000. All payments are monthly.

a. Should the borrower refinance if he plans to be in the home for the remaining loan term? As- sume the homeowner borrows only an amount equal to the outstanding balance of the loan.

b. Would your answer change if he planned to be in the home only five more years?

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