Suppose your friend April is considering to refinance her mortgage. She bought her house 60 months ago at $137,000. She paid cash to cover the 5% down payment plus all required closing costs (closing costs include application fee, appraisal fee, loan origination fees and other costs, usually about 3%-5% of the loan amount). Since she had a decent credit history and relatively stable income, her mortgage rate was 5.25% for 30 years at the time of the purchase. Since her down payment was less than 20%, she had to pay monthly mortgage insurance premium which is $60 per month (premiums are automatically terminated when the LTV ratio (loan-to-value ratio) falls below 80%).

Recently, mortgage rate has been dropping and she is considering to refinance her mortgage. She talked with a mortgage banker and got the following information:

3.75% 30 year conventional loan with out-of-pocket closing costs of $1,800;

3.5% 30 year conventional loan with out-of-pocket closing costs of $3,000;

3.25% 30 year conventional loan with out-of-pocket closing costs of $4,000.

Based on the recent appraisal, her house value has gone up to $151,000.

1) How much should her monthly payment be under each option (a, b, and c)? Show your calculations.

2) Would you suggest her to do the refinancing or not? Why? Notice that monthly payment is reduced but she need to make 360 payments plus closing costs under the new mortgage versus 300 payments in the old mortgage.

3) Which option would you suggest her to take? What factors would affect her choice and how?