What is the annualized irr of monthly payment savings

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Tom got a 30 year fully amortizing FRM for $400,000 at 6%, with constant monthly payments. After 3 years of payments rates fall and he can get a 27 year FRM at 5%, but he must pay 2 points and $1500 in closing costs to get the new loan. Think of the refinancing decision as an investment for Tom, he pays a fee now but saves money in the future in the form of lower payments. What is the annualized IRR of monthly payment savings from refinancing for Tom assuming he prepays the new loan 5 years after refinancing? (Clarification: Tom will prepay the new loan 3+5=8 years after the house is purchased and all costs from refinance are paid in cash at time of refinance)

Reference no: EM131837471

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