Mortgage.
You decide to buy a house in Amherst valued at $250,000 and need to borrow the entire amount to finance your house. After shopping around for a mortgage loan, you find that the following two deals from the Mortgage One Company are very attractive: (1) A 15-year fixed rate mortgage with no point and an APR of 5%, compounded monthly. (2) A 15-year fixed rate mortgage with two points and an APR of 4.5%, compounded monthly. A point simply represents 1% of the loan amount, and it is the front charge by lenders to reduce the loan interest rate. The money you pay for points is tax deductible. However, the Mortgage One Company does not allow you to build the point money into the mortgage, so you need to pay the point separately. For simplicity, let’s assume that you have this amount of money in your bank account. The closing costs (not including the points) for the two loans are identical. According to the law, the interests on your mortgage payments are tax deductible. In fact, at the end of each year, your lender will simply add up your 12-month interest payments (without considering the time value of money) and forward the mortgage statement to you and the IRS for tax filing purposes. Then you file your tax form according to your income tax rate of 28%. Assume that you pay your mortgage payments at the end of each month and you pay taxes at the end of each year. Question : Suppose that you chose the 5% loan to finance your house. Five years have passed since you purchased the house. You have paid 60 monthly payments with no additional payments toward the principal. The current APR for the 10-year fixed rate mortgage is 4.25% with no point. The Mortgage Two Company offers you a chance to refinance your original loan with the current 4.25% loan. They will charge you $2,500 refinancing fee. This fee is not tax deductible. After considering all the factors, should you take Mortgage Two’s offer to refinance your loan outstanding? Why or why not? Make assumptions wherever applicable and explain your answers in details.