1. After saving for the past few years, Sharon now has enough for the down payment on her house. Her dream house costs $256,000 and her down payment will be equal to 25% of this amount. After discussions with her bank she has decided to obtain a mortgage with a 20 year amortization period and a fixed rate of 5.2%. All the standard mortgage regulations apply.
a) What are Sharon’s monthly mortgage payments?
b) It is now three years from the date of Sharon’s purchase and mortgage rates have fallen significantly. She is thinking of refinancing her mortgage at a new lower rate of 3.5%. If she proceeds with the refinancing, the bank will charge her a penalty of $2500.
i) What is the current value of Sharon’s original mortgage? In other words, how much does she still owe the bank after 3 years?
ii) Calculate the PV of the savings Sharon would achieve from the re-financing. Should she proceed to refinance her house?
Hint: First, calculate the new monthly payments. Then calculate the savings. Compare the PV of savings over the remaining life of the mortgage with the penalty of 2500