Refinancing Home Mortgage
Project-Spreadsheet assignment
1. You are currently in the 7th year of a 25-year fixed rate, fully amortized mortgage with monthly payments. You originally borrowed $150,000 with a 9.50% annual interest rate. Interest rates are expected to be lower, so you are considering the feasibility of refinancing the loan. To refinance, closing costs are expected to be 3.25% of the new loan amount. You will also have to pay 1 point. Assume no prepayment penalties both with the original and new loans.
A) Using a spreadsheet, calculate the new loan payments for every eighth of a percent from a
revised interest rate of 7.5% to 8.5%. Assume you will refinance at the end of the 7th year
of the mortgage with points and closing costs included in the new loan and you do not wish
to extend the length of the mortgage beyond its current length (i.e. the maturity of the new
loan is 18 years from now).
B) How low must interest rates go in order for you to breakeven?
C) Draw a graph to plot the new interest rate versus the new mortgage payment and show the breakeven point.
2. In this problem, you are being asked to calculate the effective borrowing cost (rate) of an adjustable rate mortgage assuming you live in the house till the loan matures under the following eight (8) scenarios:
1. Index rises 1/4% every year
2. Index rises 1/2% every year
3. Index rises 3/4% every year
4. Index rises 1% every year
5. Index rises 2% every year
6. Index falls 1/4% every year
7. Index falls 1/2% every year
8. No change in index
A description of the 1-year ARM with monthly payments is as follows:
Amount: $100,000
Maturity: 15 years
Points: 2
Closing Costs: 4%
Initial Contract Rate (teaser): 3.75%
Margin: 125 bps (1basis point = 0.01%)
Current Index Yield: 4%
Caps and Floors: Annually: 1%, Lifetime: 3%
This is about mortgage information questions.
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