A borrower has secured a 30 year, $320.000 loan at 7%. Ten years later, the borrower has the opportunity to refinance with a twenty year mortgage at 6%. However, there is an upfront fee of $2500, which will be paid in cash.
a. What is the return on investment (refinance) if the borrower expects to remain in the home for the next five years? Should the borrower refinance the the loan?
b. What is the return on investment (refinance) if the borrower expects to remain in the home for the next twenty years? Should the borrower refinance the loan?