PFIN 3rd Edition by Lawrence Gitman,Michael Joehnk,Randall Billingsley

Exercise 7

Use Worksheet 5.4. Miao Tian purchased a condominium 4 years ago for $200,000, paying $1,250 per month on her $162,000, 8 percent, 25-year mortgage. The current loan balance is $152,401. Recently, interest rates dropped sharply, causing Miao to consider refinancing her condo at the prevailing rate of 6 percent. She expects to remain in the condo for at least 4 more years and has found a lender that will make a 6 percent, 21-year, $152,401 loan, requiring monthly payments of $1,065. Although there is no prepayment penalty on her current mortgage, Miao will have to pay $1,500 in closing costs on the new mortgage. She is in the 15 percent 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.
REFERENCE WORKSHEET 5.4: