If the calculator steps can be included that would help alot. 29. Considering th

Question

If the calculator steps can be included that would help alot.

29. Considering the following information, what is the NPV if the borrower refinances the loan? Expected holding period: 15 years, Current loan balance: $100,000; Current loan interest: 7%; Current loan mortgage payment: $898.33; Remaining term on current mortgage: 15 years; New loan interest: 5.5%; New loan mortgage payment: $817.08; New loan term: 15 years; Cost of refinancing: $$5000. Assume that the opportunity cost is the interest rate on the new loan (5.5%).

30. Considering the following information, what is the NPV if the borrower refinances the loan? Expected holding period: 3 years, Current loan balance: $100,000; Current loan interest: 7%; Current loan mortgage payment: $898.33; Remaining term on current mortgage: 15 years; New loan interest: 5.5%; New loan mortgage payment: $817.08; New loan term: 15 years; Cost of refinancing: $5,000. Assume that the opportunity cost is the interest rate on the new loan (5.5%).

31. Suppose that you are in the process of deciding whether or not to refinance your fixed rate mortgage at a lower rate and you are interested in using the payback period rule of thumb to help you in your decision. Your lender has informed you that the cost of refinancing would be $4,300. If your original monthly mortgage payment was $1,250 and your new monthly mortgage payment would be $1,150 after refinancing, determine the payback period.

32. Suppose you have just purchased your first home for $300,000. At the time of purchase you could afford to commit 20% of the purchase price to a down-payment. Suppose over time you paid down the principal of the loan to $220,000 and at that point in time you can no longer make any mortgage payments (i.e., you default on the loan). If the lender were to foreclose on your property and sell it for $190,000, determine the amount of the loan’s principal that the lender was unable to recover due to the default.

Explanation / Answer

Savings on Payment per month = $898.33 - $817.08 = $81.25

NPV of Savings = $81.25*PVAF0.4583%, 180    => $81.25* 162.84325140451 = $13,231.01

(Use online calculator or PVFA table to find the PVAF value)

Note: (0.055/12 => monthly interest rate, 15 Years * 12 = 180 Months)

NPV = $13,231.01 - $5,000(Cost of refinancing) = $8,231.01

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