Given the recent drop in mortgage interest rates, you have decided to refinance your home. Exactly five
Question:
Given the recent drop in mortgage interest rates, you have decided to refinance your home. Exactly five years ago, you obtained a $550,000, 30-year mortgage loan (L1) with a fixed rate of 5.5%. Today, you can get a 30-year loan for the currently outstanding loan balance at 3.75% interest. This loan (L2), however, requires you to pay a $3,000 in front-end fees and 2 points at the time of the refinancing (1 point equals 1% of the amount borrowed). Ignore tax considerations
(i). What is the outstanding balance on the L1 loan today, if you just made the 60th payment?
(ii). How much will your monthly payments be for L2 after you refinance?
(iii)Should you refinance? Answer this question by computing your effective borrowing cost on L2 and comparing it with L1. Show your computations.