Question

Question 1 (1 point) Suppose a homeowner has an existing mortgage loan with these terms: Remaining balance of $220,000, interest rate of 6%, and remaining term of 8 years (monthly payments). This loan can be replaced by a loan at an interest rate of 5% , at a cost of 4% of the outstanding loan amount. You feel the appropriate opportunity cost to apply to this refinancing decision is 6%. What is the net present value (NPV) of refinancing, assuming the loan will be held to maturity? a) -$739.06 b) $1,018.88 c) $2,681.64 d) $7,984.17 e) $8,060.94 Question 2 (1 point) Assume an elderlv.counle owns a $370 000 home that

Answer 1

a. -$739.06

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

D Existing terms $220,000.00 Refinance terms $220,000.00 5% 0.4167% 6% 0.5000% Remaining Balane Interest rate Monthly interest rate remaining terms (years) remaining no. of monthly payments Monthly payments 96 96 $2,785.18 $2,891.11 Saving in monthly payments with refinance Cost to refinance Opportunity cost (monthly) NPV of refinance $105.93 $8,800.00 0.005 $739.06 15

Cell reference -

24 Existing terms Refinance terms 220000 0.06 =C4/12 =C3 0.05 =D4/12 Remaining Balane Interest rate Monthly interest rate remaining terms (years) remaining no. of monthly payments Monthly payments =C6*12 =PMT(C5,C7,-C3,0) =D6*12 =PMT(D5,D7,-D3,,0) Saving in monthly payments with refinance =C8-D8 Cost to refinance =4%*C3 Opportunity cost (monthly) =6%/12 NPV of refinance =PV(C12,D7,-€10,0)-C11 14 1

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.