13.6
6.Your good friend Bono has noticed that interest rates are currently low. He is considering refinancing his Irish Castle and he wants your advice. If you can save him some money, he might get you some tickets to U2’s show in Seattle. He currently has 20 years left (240 payments) on his 30 year mortgage. The rate on his existing mortgage is 9%, but current rates for 20 year mortgages are 6%. Bono’s original mortgage was for $1,500,000. Assume all rates are APRs, compounded monthly and use the above information to answer the following questions.
a. What are Bono’s current monthly payments? (the payments on the existing 30 year mortgage (taken out 10 years ago at 9% for $1,500,000) (5 pts)
b. If Bono wants to pay off the existing mortgage today, how much cash would he need? Assume that he made his 120th monthly payment today. HINT: What is the PV of the remaining payments on the old mortgage at the old interest rate? If you didn’t get (a), assume his payments are $8000/month. (5 pts)
c. If Bono decides to refinance at current rates with a 20 year mortgage for the remaining balance on his old mortgage , will his payments be higher or lower? You do not need to do any calculations for this, just tell me which direction the payments will go and why you think that. (4 pts)
d. Let’s say he keeps his old mortgage. Under the current interest rate, should the present value of all of his future payments be more or less than the payoff to his loan (from part b)? Why? Again, no calculations are necessary. (4 pts)