16. (Refinancing mortgage, EAIR) Michael Smith was in trouble: He was unem ploye

Question

16. (Refinancing mortgage, EAIR) Michael Smith was in trouble: He was unem ployed and living on his monthly disability pay of $1,200. His credit card debts of $19,000 were threatening to overwhelm this puny income. Every month in which he delayed paying the credit card debt cost him 1.5% on the remaining balance. His only asset was his house, on which he had a $67,000 mortgage. Then Michael got a phone call from Uranus Financial Corporation: The corporation offered to refinance Michael's mortgage. The Uranus representa- tive explained to Michael that, with the rise in real estate values, Michael's house could now be re-mortgaged for $90,000. This amount would allow Michael to repay his credit card debts and even leave him with some money. Here are some additional facts: The new mortgage would be for 25 years and would have an annual interest rate of 9.23% (this is APR, ie, stated rate). The mortgage would be repayable in equal monthly payments over this term, at a monthly interest rate of 9.23%/12-0.76917%. The fees on the new mortgage are $8,000 to be paid today. There are no penalties involved in repaying the $67,000 existing mortgage.

Explanation / Answer

1.
Using financial calcultor:
N=25*12=300
I/Y=9.23%/12
PV=90000
CPT PMT=769.5
2.
=90000-67000-19000=4000
3.
=(1+9.23%/12)^12-1=9.6307%

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