12 months 9. Your final reports should contain the following: a. A cover page wi

Question

12 months 9. Your final reports should contain the following: a. A cover page with all group members; b. Original financial statements for both firms for year 2015 &2016 e. Price movement charts for the 2 firms in the past 3, 6, 12 months; d. Your ratio calculation/ explanation and your Du Pont analysis Part II - Mortgage Refinance Suppose your friend April is considering to refinance her mortgage. She bought her house 60 months ago at $127,000. 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 S60 per month (premiums are automatically terninated 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. talked with a mortgage banker and got the following information: She 375% 30year conventional loan with out-of-pocket closing costs ofsi S00; b) a) 3.5% 30,year conventional loan with out-of-pocket closing costs of S3,000; c) 3.25% 30yRK conventional loan with out-of-pocket closing costs of S4 ,000, Based on the recent appraisal, her house value has gone up to $151,000 Please advise her on the following: Based on the information, please calculate her monthly mortgage payment on the original loan. Please show your process. 1) 2) Please use online resources to show her amortization table. How much principle has she paid off so far? How much interest has she paid over the past 60 payments? How much does she need to refinance now? Hint: You need to find her loan balance. Based on the new appraisal value, what is her LTV (loan-to-value) ratio now? Does she still need to pay the mortgage insurance premium after re How much should her monthly payment be under each option (a, b, and c)? Show calculations. 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 elosing costs under the new mortgage versus 300 payments in the old mortgage. 3) 4) 5) 6) financing? Why? your 7) 8) Which option would you suggest her to take? What factors would affect her choice and how?

Explanation / Answer

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on the 60th term:

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Equated Monthly Payment = EMI = $701.30

Total Interest to be paid out = $125,468

Total payment to be made (both principal and the interest) = $252,468

Part 1)

The monthly mortgage payment on the original loan is calculated using the excel function PMT(rate, nper, pv)

PMT(rate = 0.525/12 = 0.004375, nper = 30*12 = 360, pv = $127,000)

PMT(0.004375, 360, 127000) = $701.30

hence EMI = $701.30

Part 2)

Amortization table shown in excel

April has paid a principal of $ 9,970.15 so far in 60 months;

She had paid an interest of $ 32,107.77 in the past 60 payments;

This is logical as the principal keeps growing over the terms wjile the interest keeps shrinking in due course and reaches zero on the last term

Part 3)

Now, in order to refinance, she needs to borrow her loan balance plus the appreciated value of her house

She has to pay a Loan balance of $117,029.85

She had paid $9970.15 so far

Raised house value = $151,000

Amount needed to be borrowed = $151,000 - $9,970.15 = $141,029.85

Hence April need to refinance $141,029.85

Part 4)

LTV = Mortgage lien amount / value appraised of the house

= 127000/151000

= 0.841059 = 84.11%

Her LTV ratio is 84.11%

Part 5)

She will have to pay that $60 per month of mortgage insurance premium until the LTV falls below 80% - hence yes, she still have to pay that $60 insurance premium

But with the new mortgage amount of $141,029.85, the LTV will be

LTV = 141029.85/151000 = 0.934 = 93.40% > 80% so yes

Part 6)

The out of packet closing cost has no relation to the EMI

Present value = pv =

EMI under option a)

PMT(rate, nper, pv) the rate must be divided by 12 as there are 12 months per annum; similarly the number of periods must be multiplied by 12 to convert years to months;

PMT(0.0375/12, 30*12, 141029.85)

EMI = $653.13

this is less than the old MEI of $701.30

As April makes a savings of 701.30-653.13 = $48.17 per month on her EMI, it is worth refinancing

option b)

EMI = PMT(0.035/12, 30*12, 141029.85) = $633.29

option c)

EMI = PMT(0.0325/12, 30*12, 141029.85) = $613.77

Part 7)

My advice for Ms. April:

Though the EMI is reduced to $613.77 from $701.30, just a savings of 701.3 - 613.77 = $87.53 on the monthly repayment,

This is a very small amount of savings on the EMI.

In the old mortgage, she paid EMI = $701.30, Total Interest - $125,468, Total Payment (principal & Interest) = $252,468

But, with the new mortgage,

EMI = $613.77, Total Interest = $79,928, Total Payment (Principal + Interest) = $220,958

So, though she pays for 360 months, a 60 months or 5 years extra, she still pays less 252468-220958 = $31,510

So she can go for refinancing, as long as she is ready to pay EMI for the extra 60 months till 360 months

Part 8)

Option a)

Total payable: out of pocket cost + total payment

= 1800 + 235127      = 236,927

Option b)

Total payable: out of pocket cost + Total payment

= 3000 + 227984 = 230,984

Option c)

Total payable: out of pocket cost + Total payment

= 4000 + 220958 = 224,958

Option c is the best as she pays a lowest total amount of $224,958 in 30 years even though the out of pocket cost is highest at $4000 but it is compensated on the long run - hence I would suggest April to go for option c

The factors affecting her choice are the reduced interest rate of 3.25% and it affected by reducing the total payment to $224,958

The total payment amount can be calculated in 2 ways - there are emi calculators available where you enter the loan amount, term and interest rate, or we can use excel functions PMT, IPMT, PPMT, and then add up

PV $127,000 Down Payment DP 0.05*127000= $6,350.00 rate 5.25% = 0.0525 % by 12 months 0.004375 nper (MONTHS) number of periods = 30 * 12 360 insurance premium per month $60 House value appreciated to $151,000 Schedule on her original loan

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