Assume that you have a 30-year mortgage (monthly payments) at 5% interest. You have made 12 (out of 360) payments and the initial loan amount was $100,000. You are considering two loans:

1) Loan A has a 4% interest rate and upfront fees of 1% of the current loan balance but those fees would be added to the loan amount and amortized over the life of the loan. The new loan would have a 30-year (360 month) term.

2) Loan B has a 3% interest rate and upfront fees of 2% of the current loan balance but those fees would be added to the loan amount and amortized over the life of the loan. The new loan would have a 30-year (360 month) term.

Does it make sense to refinance the existing loan given these two options? If so, which option (1 or 2) is better? Explain. Note: you will need to calculate the monthly payment and current balance on the existing loan first.

Answer rating: 100% (QA)

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