Suppose that five years ago you borrowed $500,000 using a 30-year fixed-rate mortgage with an annual interest rate of 7.00% with monthly payments and compounding. The interest rate on 30-year fixed- rate mortgages has fallen to 6.25% and you are wondering whether you should refinance the loan. Refinancing costs are expected to be 4% of the new loan amount.
What is the net present value of refinancing if you make all of the scheduled payments on the new loan?
What is the net present value of refinancing if you pay off the new loan at the end of the 6th year?
How many payments do you need to make on the new loan in order for refinancing to have a positive net present value?