Question

Suppose a home buyer took out a 75% LTV loan 9 years ago to purchase a $190,000 home at a fixed interest rate of 8% amortized over 30 years with monthly payments. This loan had 3 discount points, a 1% origination fee, and a 4% prepayment penalty associated with it. The owner is thinking about refinancing and has decided to pay any costs incurred in the process out of his pocket. The loan-to-value ratio on the new loan is not a concern, since home prices in the area have been increasing steadily. The best rates currently available are 4.25% for 30 years with monthly payments. This new loan has a 0.5% origination fee, 3 discount points, and no prepayment penalty. Assuming the owner intends to remain in the home for 10 more years, what would be the return on this refinancing venture?

Answer 1