Ten years ago you obtained a 30-year mortgage for $400,000 with a fixed interest rate of 6% APR compounded monthly. The mortgage is a standard fixed rate mortgage with equal monthly payments over the life of the loan.

a. What are the monthly fixed mortgage payments on this mortgage (i.e., the minimum required monthly payments to pay down the mortgage in 30 years)?

 
b. What is the remaining loan balance immediately after making the 120th monthly payment (i.e., after 10 years)? Assume that you made all the mortgage payments on time and you only made the minimum required monthly payment over the last ten years.

c. Due to the recent decline in interest rates you can now obtain a standard 20-year fixed rate mortgage for 4.5% APR (compounded monthly). However, to refinance the loan, you need to pay refinancing costs of $3,000. Assume you will own the home for the whole 20 year period. You expect that interest rates will not decrease further. Is it beneficial to refinance your current 6% loan using this 4.5% 20-year mortgage? What is the NPV of refinancing your loan?

Answer rating: 100% (QA)

SOLUTION a To find the monthly fixed mortgage payments we can use the formula Payment P r 1 rn 1 rn 1 where P is the principal amount of the loan r is ... View the full answer