# refinancing options

Assessing a refinancing opportunity is a key component in determining the viability of a real estate investment. The purpose of this assignment is to demonstrate that the student understands the factors that should be taken into account in choosing a refinancing option, including financial calculations.

An investor obtained a fully amortizing mortgage 4 years ago for $100,000 at 12 percent for 30 years. Mortgage rates have dropped, so that a fully amortizing 25-year loan can be obtained at 10 percent. There is no prepayment penalty on the mortgage balance of the original loan, but 3 points will be charged on the new loan and other closing costs will be $2000. All payments are monthly.

Based on your calculations, respond to the following in a two- to three-page paper:

- Explain whether or not it would be financially beneficial for the investor to refinance, if the plan is to own the property for the remaining loan term. Assume that the investor refinances an amount equal to the outstanding balance of the loan. Use your calculation(s) as evidence to support your conclusion, and explain how you arrived at the calculation(s) you include.
- Explain whether or not it would be financially beneficial for the investor to refinance, if the investor planned to own the property for only five more years. Use your calculation(s) as evidence to support your conclusion, and explain how you arrived at the calculation(s) you include.

Your paper must be two to three double-spaced pages, (not including the title and reference pages) and must be formatted according to APA style as outlined in the Ashford Writing Center. Since this assignment is based on calculations, you are required to show all of your work in detail for both part (a) and part (b) by listing the components for each calculation and explaining the calculation taking place to reach the answer. This may be done in the paper, or on an attached Excel spreadsheet. Make sure that all calculation work is shown for full credit. Please use one scholarly source, in addition to the text for this assignment.

The Paper

- Must be two to three double-spaced pages in length (not including title and references pages) and formatted according to APA style as outlined in the Ashford Writing Center (Links to an external site.).
- Must include a separate title page with the following:
- Title of paper
- Studentâ€™s name
- Course name and number
- Instructorâ€™s name
- Date submitted

- Must use at least one scholarly sources in addition to the course text.
- The Scholarly, Peer Reviewed, and Other Credible Sources (Links to an external site.) table offers additional guidance on appropriate source types. If you have questions about whether a specific source is appropriate for this assignment, please contact your instructor. Your instructor has the final say about the appropriateness of a specific source for a particular assignment.

- Must document all sources in APA style as outlined in the Ashford Writing Center.
- Must include a separate references page that is formatted according to APA style as outlined in the Ashford Writing Center.

Example provided by instructor: https://youtu.be/jfP2qfjru0E

### 1. Excel Worksheet

Once again, the assignment questions are complex because they require several calculations to arrive at the final answer. Below, I will walk you through each step.

- Open an Excel worksheet.
- Type your name, course, and date at the top left.
- Write out the complete assignment prompts.
- Show all your work (the steps you took and the formulas you calculated). In Excel, simply highlight the answer fields and I can view the formula to ensure it is correct.
- Refer to my previous announcements on â€œExcelÂ® Formulasâ€ and â€œVideo Examplesâ€.

#### Part 1

â€œExplain whether or not it would be financially beneficial for the investor to refinance, if the plan is to own the property for the remaining loan term. Assume that the investor refinances an amount equal to the outstanding balance of the loan. Use your calculation(s) as evidence to support your conclusion, and explain how you arrived at the calculation(s) you include.â€

__Steps:__

**Create a table in MicrosoftÂ® ExcelÂ®.**- It needs the following columns: Loan program, annual interest rate, loan term (# of years), loan amount, and monthly payments.
- In the first row, enter the current loan program information and calculate the monthly payments using the PMT function in Excel.
- In the second row, enter the proposed loan program information and calculate the monthly payments using the PMT function in Excel.

**Compare the monthly payments.**- Subtract the monthly payments to find the difference. Which monthly payment is lower, and by how much?
- Question for discussion: why canâ€™t the interest rates be compared directly to each other?

**Solve for the net proceeds:**- Enter the amount of the proposed loan.
- Subtract the cost of refinancing (hint: points and closing costs).
- The answer equals the net proceeds from the proposed loan.
- The question isâ€¦ does the upfront cost of refinancing justify the lower interest rate on the new loan? For that answer, letâ€™s keep going and compare the effective interest rate.

**Solve for the effective interest rate of the proposed loan.**- Select a formula (Excel function). Hint: what are you solving for?
- Input the variables. Hint: present value (PV) is the net proceeds you calculated in the previous step. Remember itâ€™s a negative # in Excel.
- Solve for the effective interest rate using the formula.

**Compare the interest rates.**- Which interest rate is lower: the current loanâ€™s rate, or the proposed loanâ€™s effective rate?
- Which loan program is more beneficial for the borrower, and why? Should the borrower refinance?
- Which loan program is more beneficial for the lender, and why?

#### Part 2

â€œExplain whether or not it would be financially beneficial for the investor to refinance, if the investor planned to own the property for only five more years. Use your calculation(s) as evidence to support your conclusion, and explain how you arrived at the calculation(s) you include.â€

__Steps:__

**Add to the table in MicrosoftÂ® ExcelÂ® that you created above.**- Add the following column: Loan balance.
- In the first row, calculate the current loan balance after 5
__additional__ - In the second row, calculate the proposed loan balance after 5 years.
- Subtract the monthly payments to find the difference. Which loan balance is lower?

**Solve for the effective interest rate of the proposed loan.**- Select a formula (Excel function). Hint: what are you solving for?
- Input the variables. Hint: present value (PV) is the same
**net proceeds**you calculated in the Part 1. Remember itâ€™s a negative # in Excel. - Another hint: future value (PV) will not be 0. It will be the
**loan balance**you calculated for this loan. (Why?) - Solve for the effective interest rate using the formula.

**Compare the interest rates.**- Which interest rate is lower after 5 more years: the current loanâ€™s rate, or the proposed loanâ€™s effective rate?
- Which loan program is more beneficial for the borrower, and why? Should the borrower refinance?
- Which loan program is more beneficial for the lender, and why?

### 2. APA Style Paper

Now that youâ€™ve completed your calculations in ExcelÂ®, itâ€™s time to write your paper with the results. Be sure to answer the questions posed in the Excel calculations above.

**APA style** formatting is required for this paper, including page headers.

**Title Page** as required with your name, date, and course.

**Section headings** as follows:

**Introduction**(overview and thesis statement)**Background**(explain the textbook learning concepts)**Part 1**(explain your calculations & which loan you recommend)**Part 2**(explain your calculations & which loan you recommend)**Conclusion**(summary and re-statement of thesis)

**Citations:** You must cite the textbook, including page number, at least twice. You must cit at least two other scholarly resources to earn full credit for resources.

**References:** All sources cited must be listed in the references section. All references must be cited in the paper.

**2-3 pages minimum** length (not including blank lines, title page, or reference page).

resources:

Brueggeman, W.B., & Fisher, J.D. (2011). *Real estate finance and investments* (14th ed.). McGraw-Hill Irwin. ISBN: 9780073377339

- Chapter Six
- Chapter Eight