FIN 467 -Individual Week 2

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Q. Suppose a homeowner has an existing mortgage loan with these terms: Remaining balance of $150,000, interest rate of 8 percent, and remaining term of 10 years (monthly payments). This loan can be replaced by a loan at an interest rate of 6 percent, at a cost of 8 percent of the outstanding loan amount. Should the homeowner refinance? What difference would it make if the homeowner expects to be in the home for only five more years rather than ten?


Q. You have just signed a contract to purchase your dream house. The price is $120,000 and you have applied for a $100,000, 30-year, and 5.5 percent loan. Annual property taxes are expected to be $2,000. Hazard insurance will cost $400 per year. Your car payment is $400, with 36 months left. Your monthly gross income is $5,000. Calculate:

a. The monthly payment of principal and interest (PI).

b. One-twelfth of annual property tax payments and hazard insurance payments.

c. Monthly PITI (principal, interest, taxes, and insurance).

d. The housing expense (front-end) ratio.

e. The total obligations (back-end) ratio

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