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Evaluate the mortgage broker analysis

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1) Ralph's existing mortgage has an interest rate of 6 percent and an outstanding balance of $179,950.43. His currently monthly payment on this loan is $1,088.19. Ralph expects to move in 12 months, but needs some extra cash until then.

He has been offered a new, interest-only loan at 5.375 percent. The closing costs will be $2,827.98, which will be rolled into the loan. In addition, the lender has offered to roll real estate taxes of $642.59 and a $79.00 tax service fee into the loan balance.1 His new loan balance will be $183,500.00, with a monthly payment of $821.93 ($266.26 less than his current monthly payment).

The mortgage broker claimed that the payback on the closing costs associated with this loan was 10.62 months ($2,827.98 ÷ $266.26), implying that even with a 12- month holding period this is a good move for Ralph.

Evaluate the mortgage broker's analysis. Is this really a good deal for the borrower? Why or why not? Provide calculations to support your conclusions.

Reference no: EM133071808

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