Ten years ago Reem and Forsan took out a $150,000 mortgage to buy their new house. The mortgage was a 20-year, 10% mortgage with annual payments. Today their bank offers similar mortgages at 8% interest; however, when the young couple went to the bank to inquire about the possibility of refinancing the remainder of their mortgage with a 10-year, 8% mortgage, they were informed that the bank has a $15,000 “exit fee” for the refinancing.
Should they still refinance the mortgage? (No. The EAR for the new mortgage is 10.98%.)
We offer some hints:
• The remaining mortgage principal at any point is the present value of the future payments on the mortgage. Further hint: Use Excel’s PV function.
• Excel’s Rate function can compute the IRRs of fixed payment loans. Use excel functions to anwser the question, the already posted questions are incorrect.