Five years ago a borrower incurred a mortgage for $80,000 at 10% for 30 years,...
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Five years ago a borrower incurred a mortgage for $80,000 at 10% for 30 years, monthly payments. 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 4% closing cost on a new loan.
a. If the borrower plans to hold either mortgage for the next 25 years, should they refinance?
b. If the borrower plans to hold either mortgage for 8 more years only, should they refinance?
c. If the new loan term is 30 years and the borrower plans to hold it until the end, should they refinance?
d. If the new loan term is 15 years and the borrower plans to hold it until the end, should they refinance?
Use both methods (with and without discounting) to calculate total savings.
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To determine whether the borrower should refinance their mortgage we will analyze the situation step by step for each scenario provided Well calculate the total costs associated with both the existing mortgage and the new mortgage considering the prepayment penalty and closing costs Step 1 Current Mortgage Details Original Mortgage Amount 80000 Interest Rate 10 Term 30 years Monthly Payment We will calculate this using the formula for a fixedrate mortgage payment Monthly Payment Calculation The formula for the monthly payment M on a mortgage is M P fracr1 rn1 rn 1 Where P loan principal amount borrowed r monthly interest rate annual rate 12 n number of payments loan term in months For the existing mortgage P 80000 r frac1012
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