Suppose you enter into a loan agreement to borrow $100,000 to help finance the purchase of a new home. The loan contract specifies a term of 30 years with monthly payments determined at a fixed rate of 6% APR (compounding monthly).
a. What is the amount of your monthly repayments?
b. Now suppose that exactly five years have passed (you made the 60th repayment yesterday). A rival lender offers to refinance your loan at a fixed rate of 5% APR (compounding monthly). Costs associated with this refinancing amount to $2,000. Should you refinance?