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CIC3020 CASES IN FINANCE (SEM 2, SESSION 2020/2021)

Presenters: GROUP 1, TEAM 2 Siew Min Ann		17116250 Vinie Ng			17077230 Sau Jean Ying		17122710 Kartik A/L Kunasegaran	17156508

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A couple: Jacqueline &      Keith Sommers Decided to buy a two-story house in Midwest Price: $ 300,000

Decided to refinance  their mortgage at a  2.75%, 15-year rate To reduce financing cost

2 options: 30-year, 6.75%   (Lower monthly payment) 15-year, 5.25% Downpayment: 20%

Worsening Mortgage rate had come down significantly

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What is Jacqueline & Keith’s monthly mortgage payment prior to the refinancing?

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The total payment paid in the first 5 years which includes the down payment made and the PMT paid for the first 5 years is  $153,398.40

During the first five years of owning their dream house, how much money has the couple paid towards the mortgage? What proportion of this has been applied towards interest ?

The proportion of interest paid in the first 5 years is  84.26%

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Difference between the monthly payment of 15-year at 5.25% and 30-year at 6.75% = $1,929.31 - $ 1,556.64 =  $372.67

Monthly payment of 15-year at 5.25% is higher by   $372.67

Had the couple opted for the original 15-year mortgage proposal (15 years, 5.25%), how much  higher  would their  monthly payment  have been?

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How much of  total interest  would have been  paid  over the life of the loan?

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Total interest paid on 30-year, 6.75% mortgage is almost  3 times more  than total interest paid on 15-year, 5.25% mortgage.

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If the Sommers had chosen the original 15-year, 5.25% mortgage proposal, how much tax shelter would they have lost (over the last 5 years) as compared to the 30-year, 6.75% mortgage?

*Assume Tax Rate is 24% (Source: IRS, 2021)

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The excess available equity due to  refinancing is  $94,198.30

If the house currently worth $355,000 and most lenders are willing to lend up to 90% of home value, how much excess equity can sommers cash out?

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No,they should not cash out the excess equity as the  yield after tax < cost of fund after tax  However this case can be changed if they could  invest in a risk free investment that yields more than 2.09% after tax.

Should Jacqueline and Keith cash out the excess equity that they have built up? Assume money market rates are 2.15%

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If the Sommers had  increased each payment by one-twelfth  (since the beginning of the loan), what would their  current loan balance  amount to?

Construct Amortization Schedule using new monthly payment

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Using the  assumption in question 8 , how many  total years  would it take for the Sommers to  pay off the existing loan ? Demonstrate your answer with an  amortization schedule.

Number of year     = 288/ 12       = 24 years

With assumption in question 8,  It takes  24 years  for the couple to pay off the existing loan

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Should Jacqueline and Keith close the 2.75%, 15-year mortgage? Explain your answer with suitable calculations.

Without Refinance Refinance PMT $1,556.64 $2,168.20  Year of Installment 25 15  Annual Interest Rate 6.75% 2.75%  Total Interest Paid $320,388.76 $70,775.30  Tax Shield $76,893.30 $16,986.07

Nominal PV Interest Saved $249,613.45 $166,027.34 Loss in Tax Shield $59,907.23 $49,953.89 Difference $189,706.22 $116,073.45

Couple should  refinance  their mortgage loan @ 2.75% for 15 years

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