Question

Ann got a 30 year FRM with annual payments equal to $12,000 per year. After 2 years of payments Ann will refinance the balance into a 28 year FRM with annual payments equal to $10,000 per year. Refinancing will cost Ann $2,500. Ann will prepay the new loan 3 years after refinancing. She will save $4,000 on her loan balance when she prepays. What is Ann s annualized IRR from refinancing?

Answer 1

Answer:

Ann s annualized IRR from refinancing is -0.0960

Explanation:

A / 1 B                                               C          D E F G H

2 Ann        

3 FRM duration in years                 30      

4 Annual payment $                    12,000      

5 Total Payments for 30 years        $360,000    

6 Payments made for                 2             years    

7 Payment amount for 2 year         $24,000      

8     after two years FRM outstanding  $336,000    

9        

10 Refinancing is done for                  28               years    

11 Annual payment                          $10,000      

12 Total Payments for 28 years $       280,000    

13 Refinancing Cost                           $2,500      

14 Total amount of cost                   $282,500    

15 Balance outstanding before refinancing   336,000    

16 Amount saved at the end of 2nd year   $53,500     period cashflow cash payment  cost of refinance prepayment NetFlow

0     360,000                                                    360,000

1                  (12,000.0)                                   (12,000)

2                              (12,000.0)       (2,500)                   (14,500)

3    280,000.0  (10,000)                                (336,000) (66,000)

4                   (10,000)                                                   (10,000)

5                              (10,000)                              (246,000) (256,000)

    640,000 (54,000)                (2,500)     (582,000)        1,500

IRR = -0.0960%

Therefore, Ann s annualized IRR from refinancing is -0.0960