Eight years ago you borrowed $200,000 to finance the purchase of a $240,000 house. The interest rate

Question:

Eight years ago you borrowed $200,000 to finance the purchase of a $240,000 house. The interest rate on the old mortgage is 6%. Payment terms are being made monthly to amortize the loan over 30 years. You have found another lender who will refinance the current outstanding loan balance at 4% with monthly payments for 30 years. The new lender will charge two discount points on the loan. Other refinancing costs will equal $6,000. There are no prepayment penalties associated with either loan. You feel the appropriate opportunity cost to apply to this refinancing decision is 4%.

a. What is the payment on the old loan?

b. What is the current loan balance on the old loan (five years after origination)?

c. What should be the monthly payment on the new loan?

d. Should you refinance today if the new loan is expected to be outstanding for five years?

Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...