A home owner obtained a mortgage 10 years ago for OMR 150,000 at 11.5% amortized over 35 years. Mortgage rates have dropped, so that a 25-year loan can be obtained at 7%. There is 2% prepayment penalty on the mortgage balance of the original loan but there is no prepayment penalty on the mortgage balance of the new loan. Four points will be charged on the new loan and other closing costs will be OMR 2,500.
a. Should the borrower refinance if he plans to be in the home for the remaining loan term? Assume the homeowner borrows only an amount equal to the outstanding balance of the loan.
b. Would your answer to part (a) change if he planned to be in the home for only one more years? Why?
c. Would your answer to part (a) change if he planned to be in the home for only 5 more years? Why? (Note: ignore part (b) here)
d. Explain the difference between your answers in parts (a), (b), and (c).