In: Finance
Your neighbor approached you about a dilemma he has with his mortgage. He purchased his house in 2006 with a $600,000, 6% fixed rate, 30 year mortgage. Then the great recession hit. Today his house is estimated to be worth less than the balance he owes on the mortgage. Furthermore, he was forced to take a new job at 20% less than what he was earning when he purchased the house. Here in 2012, 72 months later, he is contemplating entering into a mortgage modification program sponsored by the government. It offers 3 options.
Which option would minimize his monthly mortgage payment? Assume all refinancing costs will be paid by the government.
Loan (P)= 600000
interest rate = 6%
Monthly rate (i)= 6%/12 = 0.005
Number of Monthly payment (n)= 30*12 =
360
Monthly payment formula = P*i/(1-((1+i)^-n))
600000*0.005/(1-((1+0.005)^-360))
3,597.30
After 72 months , months remaining (n)= 360-72=
288
Unpaid balance at month 72 formula (P)=monthly payment
*(1-((1+i)^-n))/i
3597.30*(1-((1+0.005)^-288))/0.005
548,387.24
First option
Loan is Previous Balance that (P) is =
548,387.24
interest rate = 4.5%
Monthly rate (i)= 4.5%/12 = 0.00375
Remaining months (n)= 288
Monthly payment formula = P*i/(1-((1+i)^-n))
548387.24*0.00375/(1-((1+0.00375)^-288))
3,117.17
Second option
Loan principal reduced. So Loan balance =
548387.24-100000= 448,387.24
interest rate = 6%
Monthly rate (i)= 6%/12 = 0.005
Number of Monthly payment (n)= 288
Monthly payment =
448387.24*0.005/(1-((1+0.005)^-288))
$2,941.32
Third option : Refinancing
Loan is Previous Balance that (P) is =
548,387.24
interest rate = 4.00%
Monthly rate = 4%/12= 0.003333333333
No of years= 15
No of months =15*12= 180
Monthly payment =
548387.24*0.00333333333/(1-((1+0.0033333333)^-180))
$4,056.35
Least Monthly Payment is in Second option $ 2941.32. So Choose
forgiveness of $100,000 of the principle due and continuing at
6%
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