Should they still refinance the mortgage

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Reference no: EM131835950

Ten years ago Reem and Forsan took out a $150,000 mortgage to buy their new house. The mortgage was a 20-year, 10% mortgage with annual payments. Today their bank offers similar mortgages at 8% interest; however, when the young couple went to the bank to inquire about the possibility of refinancing the remainder of their mortgage with a 10-year, 8% mortgage, they were informed that the bank has a $15,000 “exit fee” for the refinancing.

Should they still refinance the mortgage? (Answer: No. The EAR for the new mortgage is 10.98%.)

We offer some hints:

• The remaining mortgage principal at any point is the present value of the future payments on the mortgage. Further hint: Use Excel’s PV function.

• Excel’s Rate function can compute the IRRs of fixed payment loans.

Please show how to do it in Excel and any formulas used.

Reference no: EM131835950

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