Section 1 - Mortgage refinance (25 points)

Question 1-3 use the following information:

Seven years ago a borrower took a mortgage for $150,000 at 6% for 30 years. Their monthly payment for this mortgage is $899.33.

Now another lender offers them to refinance to a new 23-year mortgage at the current interest rate of 5.25%. Their new monthly payment will be $840.05.

The existing mortgage has a prepayment penalty of 3% of the outstanding loan balance. The closing cost of the new mortgage is 2% of the loan amount.

Question 1 (5 points)

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Assume that they intend to hold either mortgage until the end. Without discounting, should they refinance?

Question 1 options:

	No, total savings of $5,389 < total refinancing cost of $6,723
	No, total savings of $6,255 < total refinancing cost of $6,723
	Yes, total savings of $22,450 > total refinancing cost of $6,723
	Yes, total savings of $16,361 > total refinancing cost of $6,723

Question 2 (5 points)

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Similar to question 1 above but with discounting. Should they refinance?

Question 2 options:

	Yes, total savings of $9,488 > total refinancing cost of $6,723
	Yes, total savings of $7,935 > total refinancing cost of $6,723
	No, total savings of $6,590 < total refinancing cost of $6,723
	No, total savings of $2,132 < total refinancing cost of $6,723

Question 3 (7.5 points)

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Assume they intend to hold either mortgage for another 5 years only. Without discounting, should they refinance?

Question 3 options:

	Yes, total savings of $12,804 > total refinancing cost of $6,723
	Yes, total savings of $8,815 > total refinancing cost of $6,723
	No, total savings of $3,993 < total refinancing cost of $6,723
	No, total savings of $4,915 < total refinancing cost of $6,723