Aaron and Barbara are purchasing their first principal residence, a newly built 2 Bedroom condominium overlooking the Raritan River in New Brunswick, NJ.The purchase price is $375,000.They require a $285,000 mortgage to complete the purchase.Their local bank has calculated their monthly mortgage payment based on the following terms shown below:

Loan Amount -$285,000

Annual Interest Rate-4%

Term-30 years

Monthly P&I Payment-$1,360.63

Aaron and Barbara have been married for 4 years and have a combined monthly gross income of $8,000.The condominium developer has provided the couple with the following estimated Basic Monthly Housing Expenses (1^st ratio expenses):

Property Taxes-$400

Property Insurance-$140

Homeowners Association Dues -$30

___________

Total Basic Monthly Housing Expenses$570

The local bank has informed Aaron and Barbara that conventional residential mortgage loans are underwritten based on the following 3 lending ratios:

Loan to Value ................................................................................................... 80% max

1^st ratio:Basic Monthly Housing Expenses / Total Monthly Gross Income .............28% max

2^nd ratio:Basic Monthly Housing Expenses plus Total of all other regular

monthly payments / Total Monthly Gross Income..................................36% max

The couple has completed a residential loan application reporting all other regular monthly expenses as follows:

Credit card payments-$200

Auto loan payments-$330

Educational loan payments-$350

___________

Total of All Other Regular Payments$880

Question:

Assume that Aaron and Barbara accept and close on this $285,000 loan at 4% for 30 years.Five years from the closing, they discover that current interest rates are 3%.If they decide to proceed with refinancing (hint - this would now be a 25 year mortgage), the closing costs would be 2 points and $1,500.

a. Is refinancing beneficial for them?

b. Calculate the annual Yield to Refinance