You bought a house at $312,500 and borrowed $250,000 in a fully amortizing 30 year fixed-rate mortgage at an interest rate of 7% to buy your home 5 years ago. You have lived in your home for 5 years and still have the original loan.
1. How much could you borrow against the value of the home, assuming housing prices increased 2% per year for the last 5 years and the bank would again allow you to borrow 80% of the value of the home?
2. A lender has approached you with an offer to cash-out refinance at 6.4% with 80% LTV. There are 2 percent discount points and $2000 closing fees for the new loan (no prepayment penalty). What amount could a borrower ‘cash out’ due to refinancing?
3. What is return of the cash-out refinance (in percent) assuming the new loan is made for 25 years and you hold the new loan until maturity? (Note: I am NOT asking the effective cost of borrowing)