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John smith contracted a 30-year FRM (with monthly amortization) loan of $80,000 at an interest rate...

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Finance

John smith contracted a 30-year FRM(with monthly amortization) loan of $80,000 at an interest rate of15% from Bank of America 5 years ago for a residential property. Inthe meantime, Brookline Savings Bank can refinance the currentbalance on the loan at interest rate of 14% for a FRM amortizedover 25 years. However, he also estimated the total refinancingcost to be $2,525, in addition to the prepayment penalty on theexisting loan of 2%.

If John holds the mortgage debt for 25more years, would you recommend him to refinance? What if he onlyneed the debt for 10 more years from now?

Answer & Explanation Solved by verified expert
3.9 Ratings (445 Votes)
As per amortization table refer image attachedIf the Mortgage Debt is held for 25 more years the totalinterest cost is 22445881In case the loan is refinanced from Brookline Savings Bank atthe interest rate of 14 total cost is as followsParticularsAmount in Interest 1420621282Refinance cost252500Prepayment penalty 2157952Total Cost21031734Since Refinancing will cost lesser than the current loan werecommend John Smith to avail refinance the loanEven if the finance is availed for 10 more years from nowInterest at current rate of 15 will be 7392164In case the loan is refinanced from Brookline Savings Bank atthe interest rate of 14 total cost is as followsParticularsAmount in Interest 146817102Refinance cost252500Prepayment penalty 2157952Total    See Answer
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Transcribed Image Text

John smith contracted a 30-year FRM(with monthly amortization) loan of $80,000 at an interest rate of15% from Bank of America 5 years ago for a residential property. Inthe meantime, Brookline Savings Bank can refinance the currentbalance on the loan at interest rate of 14% for a FRM amortizedover 25 years. However, he also estimated the total refinancingcost to be $2,525, in addition to the prepayment penalty on theexisting loan of 2%.If John holds the mortgage debt for 25more years, would you recommend him to refinance? What if he onlyneed the debt for 10 more years from now?

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