Assignment:
You have had a 6% 30 year fully amortizing level payment mortgage (LPM) for 5 years. The fees on this mortgage were 4%, its initial balance was $600000, and it has a prepay penalty of 2%. You are considering a 15-year cash-out refi mortgage (fully amortizing LPM) at 5%, with 4% fees. You will finance these fees, take $30000 out, and the new mortgage has no prepayment penalty. You can borrow the $30000 elsewhere as a 5-year annuity at 7% with 2% fees (assume that you will finance these fees, also),
If you plan to sell your house 10 years from now, what is the NPV of refinancing? Assume that your opportunity cost of borrowing is 6%, no loan payment is ever curtailed, and ignore taxes and the option to wait to refinance.