Five years ago, Sam purchased a house of $500,000. Sam borrows a mortgage with 80% of LTV (loan to value ratio). The interest rate on the mortgage is 5%. Payment terms are being made monthly to amortize the loan over 30 years. Sam has found another lender who will refinance the current outstanding loan balance at 4.0% with monthly payments for 30 years. The new lender will charge two discount points on the new loan. Other refinancing costs will equal $2,000.
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a. What is Sam's monthly payment for the current loan?
b. What is the new loan amount if Sam chooses to refinance?
c. What is Sam's monthly payment for the new loan?
d. What is the effective cost of Sam's new loan if he holds the loan for 30 years?
e. If Sam wants to refinance today, at least how many years should he stay in the house (do not prepay)? Explain?
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