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 amount 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 effective cost of refinancing?
A)9.00%
B)10.85%
C)15.32%
D)9.39%

Question

Quizplus · Accepted Answer

The effective cost of refinancing is calculated by considering the new interest rate, the remaining balance, the term of the new loan, and the costs associated with refinancing. The effective cost is not simply the new interest rate (9.0%) because it must account for the $4,500 in origination and closing costs. These costs effectively increase the interest rate beyond the nominal rate of 9.0%. The correct calculation involves determining the interest rate that equates the present value of the new loan's payments (including the costs of refinancing) to the remaining balance of the original loan. This calculation results in an effective cost of refinancing of 9.39%.

A Borrower Made a Mortgage Loan 7 Years Ago for $160,000