Managing Mortgage Case Study Paper

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Case Study Managing a Mortgage

Questions

1. Suppose there was no penalty for refinancing the mortgage after 3 years. How

much would Malcolm and Shannon save per month by refinancing their mortgage

for a 5-year term at the new rate?

Old rate

Mortgage payment = P*((1+i) ^n)/(1+i) ^n – 1

Semi annual interest rate = 7.5%

Annual interest rate = 15%

Monthly interest rate = 15%/12 = 1.25%

= 180,000 * [(1+ 0.0125) ^60 / (1+0.0125) ^60 – 1]

=\$342576 after five years

On monthly basis = \$342576/60

= \$5709.6

New rate

Mortgage payment = P*((1+i) ^n)/(1+i) ^n – 1

Semi annual interest rate = 5.5%

Annual interest rate = 11%

Monthly interest rate = 11% / 12 = 0.92

= 180,000 * [(1+ 0.0092) ^60 / (1+0.0092) ^60 – 1]

= \$425790

On monthly basis;

\$425790 / 60

\$7096.5

Monthly save = \$7096.5 - \$5709.6 = \$1386.9

2. Suppose the couple choose to refinance their mortgage for a 5-year term at the

new interest rate.

a. What is the amount of penalty A?

Total amount of mortgage after five years = \$425790

If they default, they will pay one-month interest of mortgage remaining * 3

After three years, remaining balance will be;

\$425790 – (12 *\$7096.5 * 3) = 170,316

Monthly interest using original interest rate

7.5% * 170,316 = 12773.

\$12773.7 * 3 = \$38321.1

b. Wh...

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