Home Mortgage Refinancing! Case Study Possible Points: 10 When Evelyn and Paul Peters were "house hunting" five years ago, the mortgage rates were quite high. The fixed rate on a 30-year mortgage was 9%, while the 15-year fixed rate was at 8%. After walking through many homes, they finally reached a consensus and decided to buy a $200,000 two-story house in an up and coming suburban neighborhood in the Midwest. To avoid prepaid mortgage insurance (PMI), the couple had to borrow from family members and come up with the 20% down payment and the additional required closing costs. Since Evelyn and Paul had already accumulated significant credit card debt and were still paying off their college loans, they decided to opt for lower monthly payments by taking on a 30-year mortgage, despite its higher interest rate. Currently, due to a worsening of economic conditions, mortgage rates have come down significantly and the "refinancing frenzy is under way. Evelyn and Paul have seen 15 year fixed rates (with no closing costs) advertised at 5% and 30-year rates at 6%. Evelyn and Paul realize that refinancing is quite a hassle, due to all the paperwork involved, but with rates being down to 30-year lows, they don't want to let this opportunity pass them by About two years ago, rates were down to similar levels, but they had procrastinated, and had missed the boat. This time, however, the couple called their mortgage officer at the Uptown Bank and locked in the 5%, 15-year rate. Nothing was going to stop them from reducing the cost of paying off their home this time! I 1) Assume that Evelyn and Paul make only one mortgage payment per year on December 31 of each year (i.e., one annual payment in each of the 30 years of their current mortgage) What is Evelyn and Paul's annual mortgage payment prior to the refinancing? 2) Prepare an amortization schedule similar to Slide #2 of the Powerpoint file on "Loan Amortization" attached to this case study. Your annual amortization schedule should contain a separate line for each year of Evelyn and Paul's current 30-year mortgage. a. During the first five years of owning their own home, how much money has the couple paid in total, including both principal and interest? b. What proportion or percentage of the total payments that the couple has made over the past five years have been applied toward interest on the mortgage loan? 100S D Focus RA Coor 3) If the couple had originally chosen the 15-year mortgage proposal (15 years at 8% annual interest), how much higher would their annual payment have been? a. Under the original 15 year, S% mortgage option, how much total interest would have been paid over the life of the loan? I 4) Prepare an amortization schedule for the proposed 5%, 15-year mortgage refinancing option. Assume that one payment is made annually on December 31 of each year. I a. Should Evelyn and Paul refinance their home with the 5%, 15-year mortgage? Explain your answer. Home Mortgage Refinancing! Case Study Possible Points: 10 When Evelyn and Paul Peters were "house hunting" five years ago, the mortgage rates were quite high. The fixed rate on a 30-year mortgage was 9%, while the 15-year fixed rate was at 8%. After walking through many homes, they finally reached a consensus and decided to buy a $200,000 two-story house in an up and coming suburban neighborhood in the Midwest. To avoid prepaid mortgage insurance (PMI), the couple had to borrow from family members and come up with the 20% down payment and the additional required closing costs. Since Evelyn and Paul had already accumulated significant credit card debt and were still paying off their college loans, they decided to opt for lower monthly payments by taking on a 30-year mortgage, despite its higher interest rate Currently, due to a worsening of economic conditions, mortgage rates have come down significantly and the "refinancing frenzy is under way. Evelyn and Paul have seen 15-year fixed rates (with no closing costs) advertised at 5% and 30-year rates at 6%. Evelyn and Paul realize that refinancing is quite a hassle, due to all the paperwork involved, but with rates being down to 30-year lows, they don't want to let this opportunity pass them by. About two years ago, rates were down to similar levels, but they had procrastinated, and had missed the boat. This time, however, the couple called their mortgage officer at the Uptown Bank and locked in the 5%, 15-year rate. Nothing was going to stop them from reducing the cost of paying off their home this time