Question

Tom got a 30 year fully amortizing FRM for $500,000 at 8%, with constant monthly payments. After 3 years of payments rates fall and he can get a 27 year FRM at 5%, but he must pay 7 points and $20000 in closing costs to get the new loan. Think of the refinancing decision as an investment for Tom, he pays a fee now but saves money in the future in the form of lower payments. What is the IRR of refinancing for Tom assuming he prepays the new loan 5 years after refinancing?

Answer 1

Payment in three year is as follows:

Payment in three years	500000/303
	50000
Value of Bond after three year	$500,000-$50,000-$20,000
	$430,000

The IRR is as follows:

Resultant table:

The IRR is as follows: