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Refinancing the payoff of the loan

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Reference no: EM132410974

Five years ago, a borrower took a mortgage for $250,000 at 6.00% for 30 years, monthly payments. This mortgage has a prepayment penalty of 3.50% of the outstanding balance at prepayment for the first 10 years of the mortgage. Currently, the market rate is 4.00 % on 25-year mortgages and the lender will charge 1.50% financing cost. There is no prepayment penalty for the new loan. The borrower's opportunity investment cost is 4.00%.

Each question is independent.

For a, b and c, the borrower is considering refinancing the payoff of the loan (remaining balance + prepayment penalty).

a. If the borrower plans to hold his/her mortgage for the next 25 years, should the borrower refinance? What is the NPV if the borrower refinances?

b. If the borrower plans to hold his/her mortgage only for eight more years, should the borrower refinance? What is the NPV if the borrower refinances?

c. If the borrower plans to hold his/her mortgage only for 10 more years, should the borrower refinance? What is the NPV if the borrower refinances?

d. If the borrower refinances the amount of $300,000 and will hold the loan for the next 25 years, should the borrower refinance? What is the NPV from the refinancing? Hint: $300,000 is new loan amount. The borrower will have left over (equity take out) after paying back the original loan.

Reference no: EM132410974

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