PFIN 5th Edition by Randall Billingsley,Lawrence Gitman,Michael Joehnk

Exercise 2

Refinancing a mortgage. Use Worksheet 5.4. Eva Chow purchased a condominium four 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 Eva to consider refinancing her condo at the prevailing rate of 6 percent. She expects to remain in the condo for at least four 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, Eva 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 Eva should refinance her mortgage under the specified terms.