Question

It is December 1, 2019, and Smiley Mirus has several debts she is considering consolidating into
one mortgage, through a refinancing process.
Firstly, Smiley has a mortgage on her house that was taken out on 3/1/15, with the
mortgage being $154,600. The mortgage, payable in monthly installments of $794.86,
is a 30 year mortgage at an annual interest rate of 4.625%. Today, 12/1/19,
immediately after the 12/1/19 payment, the mortgage balance stands at $141,941.
Secondly, Smiley has a home equity loan (a loan in which the value of the home
is used as security to the holder). This loan was taken out on 4/1/15 in the amount of
$38,600. This is a 15 year loan, at 4.375% annual interest, with monthly payments currently
at $292.83. Unfortunately this equity loan has a 5-year "balloon" provision, which states that
five years after origination of the loan (4/1/20) the bank will revise the interest rate on
the remaining loan balance to the market interest rate in effect at that time. Also, after
4/1/20, the bank will revise the loan's interest rate annually, beginning 5/1/20.
Today, December 1, 2019, the equity loan balance stands at $29,170.
Smiley would like to consolidate both loans into one fixed rate mortgate, for two reasons.
First, interest rates currently offered were extremely good. Second, the five-year balloon
entails risk that Smiley does not want to contend with, due to the possibility of the interest
rate increasing dramatically when the balloon triggers on 5/1/20.
Smiley visited her local mortgage broker and was offered the following.
::Thirty year fixed rate mortgage, annual interest rate of 2.875%, with one point.*
::Thirty year fixed rate mortgage, annual interest rate of 3.175%, with zero points.
::Fifteen year fixed rate mortgage, annual interest rate of 2.375%, with two points.
::Fifteen year fixed rate mortgage, annual interest rate of 2.75%, with zero points.
Costs to refinance and consolidate the existing loans into one mortgage total
$4,300 for the 30 year mortgages, and $3,000 for the 15 year mortgages, not including points.
These costs are added to the loan balance.
Assume payments on the new mortgage will begin12/1/19.
Prepare loan amortization schedules for the four above options, as well as for the
original loans. Use a net present value approach in formulating your analysis.
Remember, this is a cash outflow analysis and as such payback and internal rate of return
cannot be calculated. Only net present value can be calculated.
*a "point" is a fee paid for a superior interest rate, with one point amounting to one
percent of the amount borrowed, two points are two percent of the amount borrowed, etc.
This fee is added to the loan balance and included in the loan payments accordingly.
1) In your opinion, which of the above loan options, if any, should she adopt?
2) In answering #1, be sure to clearly explain the technique you used to determine your answer. Also
Also thoroughly explain what your answer means.
3) Organize your work nicely, with appropriate page breaks. Your loan amortization schedules will
be quite large covering several pages. I suggest you use the "Print titles" command to enable
the column headings to appear on each page. Poorly formatted analyses will lose points.

Answer 1

1. Given the extant values; Smiley should consider Option 2 (if required can share the excel); all schedules below
2. Net Present Value formula has been used with discounting rate of weighted average existing borrowing costs. The Costs are detailed in Worksheet 2 of the attached excel

one amortization of option 1 attached, balance would be similar (owing to size constraint could not be attached picture.