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A borrower got a mortgage loan 5 years ago for $750,000 at 7% interest for 30 years with

no prepayment penalties or closing costs. The borrower just got a call from her friendly

mortgage broker suggesting she refinance into an 5/1 ARM (for the first 5 years the

interest rate is fixed and then will adjust annually for the next 25 years and is indexed to

one-year Treasury yields with a 8% margin). The 5/1 ARM has teaser rate of 4%, a fully

adjusted rate of 11%, and closing costs of $5,000.

The borrower plans to move to Sarasota, FL when she retires in 4 years. Should she do

the refinance -- use the IRRv& NPV--(assume discount rate or opportunity cost of capital

of 4%) criteria to make the decision)

Subject: Business, Finance

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