Aaron and Barbara are purchasing their first principal residence, a newly built 2 Bedroom condominium overlooking the Raritan River in New Brunswick, NJ.The purchase price is $375,000.They require a $285,000 mortgage to complete the purchase.Their local bank has calculated their monthly mortgage payment based on the following terms shown below:

Loan Amount -$285,000

Annual Interest Rate-4%

Term-30 years

Monthly P&I Payment -$1,360.63

Aaron and Barbara have been married for 4 years and have a combined monthly gross income of $8,000.The condominium developer has provided the couple with the following estimated Basic Monthly Housing Expenses (1^st ratio expenses):

Property Taxes-$400

Property Insurance-$140

Homeowners Association Dues-$30

___________

Total Basic Monthly Housing Expenses$570

The local bank has informed Aaron and Barbara that conventional residential mortgage loans are underwritten based on the following 3 lending ratios:

Loan to Value ................................................................................................... 80% max

1^st ratio:Basic Monthly Housing Expenses / Total Monthly Gross Income .............28% max

2^nd ratio:Basic Monthly Housing Expenses plus Total of all other regular

monthly payments / Total Monthly Gross Income..................................36% max

The couple has completed a residential loan application reporting all other regular monthly expenses as follows:

Credit card payments-$200

Auto loan payments-$330

Educational loan payments-$350

___________

Total of All Other Regular Payments$880

1.Suppose the couple decides that they would like a 25 year mortgage (same $285,000 and 4% interest rate) instead of the 30 year mortgage.

a.Would they still qualify for the mortgage?Calculate the 2 standard underwriting ratios and explain why or why not.

2.Assume that Aaron and Barbara accept and close on this $285,000 loan at 4% for 30 years.Five years from the closing, they discover that current interest rates are 3%.If they decide to proceed with refinancing (hint - this would now be a 25 year mortgage), the closing costs would be 2 points and $1,500.(You might want to consult our residential lending class notes titled "Refinancing Decisions" which is on BB to help you answer this question)

a.Is refinancing beneficial for them?

b.Calculate the annual Yield to Refinance

3.Private Mortgage Insurance (PMI) can be used to enable a borrower to obtain a mortgage loan if he/she doesn't have sufficient money for the down payment.

a.Who purchases the insurance?

b.How does the lender benefit from it?

c.make an internet search to determine how much it might cost the person or entity you determined in part a who is responsible for PMI and indicate this amount or percentage.