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What are the net benefits

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Five years ago, a borrower had a mortgage of $80,000 at 10% for a time period of 30 years Currently, the market rate is 8% on 25-year mortgages. The existing mortgage has a prepayment penalty of 5% of the outstanding balance and the lender will charge a financing cost of 4% on the new loan.

If the borrower plans to hold either mortgage for the next 25 years (we suppose the term of the new loan is 25 years which is the number of years remaining on the old loan):

1) Without discounting, should he/she refinance, what are the net benefits?

2) With discounting, should he/he refinance, what are the net benefits?

Reference no: EM133076543

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