Question

. A borrower made a mortgage loan 7 years ago for $160,000 at 10.25% interest for 30 years. The loan balance is now $151,806.62 and rates for this a mount are currently 9.0% for 23 years. Origination fees and closing costs are $4,500 and closing costs are not financed by the lender. What is the ef fective cost of refinancing?

(A) 9.00%

(B) 10.85%

(C) 15.32%

(D) 9.39%

Answer 1

The correct answer is option D i.e.(D) 9.39%

Step 1- calculate the monthly payment for the mortgage loan i..e using pmt function of excel =pmt(rate,npr,pv)

rate = 9%/12 = 0.0075

npr = 23 x 12 =276

pv = -(151806.62+4500) = -156306.62

PMT=$ 1343.09

monthly payment of mortagage loan is $1343.09

step 2 calculate monthly effective cost of refinancing

using rate function of exct = rate(npr,pmt,pv)

npr = 23 x 12 =276

PMT=$ 1343.09

pv = -156306.62

rate = 0.782%

step 3- yearly effective cost of refinancing = 0.782% x 12 = 9.384% or say 9.30%

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