An investor obtained a fully amortizing mortgage 5 years ago for $95,000 at 11% for 30 years. Mortgage rates have dropped, so that a similar 25-year loan can be obtained at 10%. There is no prepayment penalty on the original loan but 3 points and a $2,000 loan fee are charged on the new loan at origination.

An investor obtained a fully amortizing mortgage 5 years ago for $95,000 at 11% for 30 years. Mortgage rates have dropped, so that a similar 25-year loan can be obtained at 10%. There is no prepayment penalty on the original loan but 3 points and a $2,000 loan fee are charged on the new loan at origination.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 14P

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An investor obtained a fully amortizing mortgage 5 years ago for $95,000 at 11 percent for 30 years. Mortgage rates have dropped so that a fully amortizing 25-year loan can be obtained at 10 percent. There is no prepayment penalty on the mortgage balance of the original loan, but three points will be charged on the new loan and other closing costs will be $2,000. All payments are monthly.a. Should the borrower refinance if he plans to own the property for the remaining loan term? Assume that the investor borrows only an amount equal to the outstanding balance of the loan.b. Would your answer to part (a) change if he planned to own the property for only five more years?
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