Problem:
Five years ago you borrowed 200,000 to finance the purchase of a 240,000 home. The interest rate on this (old) mortgage is 10% MEY, and the level payments were made monthly to amortize the loan over 30 years (you did not curtail the loan in any way, nor do you ever intend to). You have found another lender who is willing to refinance the outstanding loan balance at 8% with monthly payments over 30 years. The new lender will charge two discount points on the loan, and other refinancing costs will amount to $5,000. There are no prepayments penalties on either loan or you feel that the appropriate opportunity cost to apply to the refinance decision is 8%.
Required:
Question 1: What is the payment on the old loan?
Question 2: What is the current loan balance on the old loan (5 years after origination)?
Question 3: What would be the monthly payments on the new loan?
Question 4: Should you refinance today, if the new loan is expected to be outstanding for 5 years?
Please explain comprehensively and show all workings.