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?

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