Suppose that five years ago you borrowed $300,000 on a 30-year fixed-rate mortgage with an annual interest rate of 10% with monthly payments and compounding. The interest rate on 30-year fixed-rate mortgages has dropped to 8.5% and you're wondering if you should refinance the loan. Refinancing costs are expected to be 5% of the new loan amount. 

a. What is the net present value of the refinance if you make all the scheduled payments on the new loan?

 b. What is the net present value of the refinance if you pay off the new loan at the end of the third year? 

C. How many payments do you need to make on the new loan for the refinance to have a positive net present value?

Answer rating: 100% (QA)

To calculate the net present value NPV of the refinance we need to calculate the present value of the cash flows associated with the old loan and the ... View the full answer