PFIN 2nd Edition by Lawrence Gitman ,Michael Joehnk,Randall Billingsley

Exercise 6

Use Worksheet 5.4. Heather Zhang purchased a condominium 4 years ago for $200,000, paying $1,250 per month on her $162,000, 8%, 25-year mortgage. The current loan balance is $152,401. Recently, interest rates dropped sharply, causing Heather to consider refinancing her condo at the prevailing rate of 6%. She expects to remain in the condo for at least 4 more years and has found a lender that will make a 6%, 21-year, $152,401 loan, requiring monthly payments of $1,065. Although there is no prepayment penalty on her current mortgage, Heather will have to pay $1,500 in closing costs on the new mortgage. She is in the 15% tax bracket. Based on this information, use the mortgage refinancing analysis form in Worksheet 5.4 to determine whether she should refinance her mortgage under the specified terms.