A borrower got a mortgage loan 5 years ago for $275,000 at 6% interest for 30 years with no prepayment penalties or closing costs. The borrower just got a call from her friendly mortgage broker suggesting she refinance into an 5/1 ARM (for the first 5 years the interest rate is fixed and then will adjust annually for the next 25 years and is indexed to one-year Treasury yields with an 8% margin). The 5/1 ARM has teaser rate of 5%, a fully adjusted rate of 8, and closing costs of 6,000. The borrower plans to move to Sarasota, FL when she retires in 4 years. When she moves she must payoff all outstanding mortgages. Should she do the refinance use the IRR & NPV (assume the discount rate or opportunity cost of capital of 5%) criteria to make the decision?

Answer rating: 100% (QA)

To determine whether the borrower should refinance into the 51 ARM we will calculate the Internal Ra... View the full answer