Reference no: EM132444766

This extra credit assignment looks at a real world amortization problem.

Assume that your neighbor took a loan of $400,000 five years ago. At that time, she took a 30-year loan for 5.75%. She now wants to consider re-financing her loan. She went to a bank andwas told that re-financing her loan for 30 years would cost her $6,500 upfront and re-financingher loan for 15 years would cost her $5,000 upfront. Your neighbor is low on cash and wouldprefer to add the upfront fees into her new loan.Your neighbor comes to seek your help with her mortgage dilemma. Can you use your TimeValue of Money skills to help guide your neighbor if she should go for re-financing? You can guide her in terms of helping her understand her current interest expense versus future interestexpense, current PMT versus future PMT, how a 15-year loan versus a 30-year loan would affecther finances, etc. Help her understand by giving her different scenarios so she can make a gooddecision that suits her best. You can get the current rates from any bank website by searchingunder Mortgage Rates.

Provide your work using tables/graphs/explanations. Also, attach a PDF of the website you usedto obtain the mortgage rates. You must upload your excel files showing your work for credit.

You need to prepare your own excel amortization tables to support your explanation anddecision. Entering the numbers in the boxes in different websites and using those to get youranswers cannot be accepted and does not serve the purpose of this extra credit assignment.

Some hints/comments:

1. In U.S., the mortgage payments are monthly, so you will need calculate monthly payments (that is, use monthly compounding)

2. You would prepare 3 amortization tables (current loan, new 15-year loan, and new 30-year loan) using monthly compounding just like how we solve using Chapter 4 Amortization Notes.

3. When calculating the PV for the new 15-year and 30-year loans, note that the PV will not be $400,000 because the neighbor has already paid off some part of the loan amount in the previous 5 years. The PV for the new 15-year and 30-year loans will be the balance still remaining on the current loan after 5 years (obtained from Balance Remaining at the end of Year 5) plus the upfront fees.

4. You also need to provide a clear explanation of your excel work and provide an analysis for your findings. Your neighbor may not understand what the different amortization tables mean and how to read, analyze, and apply them. You need to give your recommendation under different scenarios for your neighbor in terms of when 15-year would be preferred or when 30-year would be preferred, etc. For example, compare the PMT under each option as it will directly affect the liquidity of your neighbor, compare the total interest amounts under each option. Based on what is important for the neighbor, she can make the correct decision that suits her situation.