Joseph & Anita Morgan are buying a new house. They have saved for several years to accumulate a down payment and have now found a house that is just perfect for their needs. It is a beautiful three bedroom Tudor house in a quiet neighborhood in the suburbs. With the help of their real estate agent and after several rounds of offering and counter-offering, they have agreed on a price of $343,000 with the sellers. The only thing that remains to make their new home a reality is to select a mortgage. Joseph & Anita are unsure about the details of making this type of decision and have come to you for guidance because of your expertise in this area.

Joseph & Anita are both 30 years old and professionally employed. They earn generous salaries and fall into the 28% effective tax bracket on their personal income taxes. They dream long term of retiring at the age of 65 so they can travel the country to take in all its scenic beauty. It is this dream that drives them to determine a mortgage arrangement that allows them to generate the maximum retirement account balance that they can create to supplement their company sponsored retirement plans. They currently have accumulated $40,000 to use for the down payment and closing costs on their house. Any excess amount not used in this way could be used as an initial deposit in their retirement savings account. Alternatively, any excess could be used to make a down payment in excess of the minimum requirement.

After studying their budget and spending patterns they have determined that they can afford $2,500/month to cover both mortgage payments and personal retirement savings. They are strongly committed to their retirement travel plans, so any of the $2,500 not spent on the mortgage will be invested in the retirement savings account. In addition, any tax savings generated through the mortgage will be deposited in the retirement account. Although they anticipate salary increases over the years until they retire, the impact of inflation and changes in lifestyle will offset these to the extent that the $2,500 per month can be considered constant over the next 35 years.

They have selected a retirement savings vehicle which involves investment in a tax sheltered mutual fund which pays an average of 7% per year compounded monthly. Joseph & Anita, with the help of an investment banker, have studied the history of this fund and are comfortable that the 7%/yr compounded monthly average return over their 35 year retirement savings horizon is reasonable. Undoubtedly there will be ups and downs but the long term average of79% appears to be reasonable and stable for planning purposes. Since this is a tax sheltered account, all investments will grow tax free until their retirement.

Joseph & Anita have identified four potential mortgage options. They will make their selection from among these four based on your recommendation.

Available Mortgages

• Mortgage I o 30 year fixed rate @ 7.58%/yr/mo, monthly payments, minimum 5% down payment, 1 point closing costs
• Mortgage II o 15 year fixed rate @ 7.13%/yr/mo, monthly payments, minimum 10% down payment, 1 point closing costs
• Mortgage III o 30 year fixed rate @ 7.08%/yr/2-weeks, bi-weekly payments, minimum 5% down payment, 1 point closing costs
• Mortgage IV o 15 year fixed rate @ 6.63%/yr/2-weeks, bi-weekly payments, minimum 10% down payment, 1 point closing costs

General Conditions Applicable to All Mortgages

• All mortgage calculations are rounded to the nearest penny on a payment by payment basis. All accumulated rounding error is compensated for with an adjustment in the final payment.
• "1 point" closing costs equals 1 percent of the loan value. These costs are associated with creating the loan and are due at the time the loan is originated (along with the down payment). They are not tax deductible.
• Joseph & Anita's timing is such that the annual mortgage cycle will coincide with the calendar year.
• Tax savings are calculated on a calendar year basis. An amount equal to 1/12th of the annualized savings is deposited in the retirement account each calendar month.
• Available retirement plan funds are deposited on a monthly basis. The monthly deposit is equal to 1/12th of the annual excess of available over required (i.e., excess = 12 * 2,500 - (annual mortgage payments).

Interest payments on all mortgages are tax deductible. This generates tax savings for each payment based on the following equation: tax savings = effective tax rate * the interest portion

• of the mortgage payment

Case Description Joseph & Anita Morgan are buying a new house . They have saved for several years to accumulate a down payment and have now found a house that is just perfect for their needs . It is a beautiful three* bedroom Tudor house in a quiet neighborhood in the suburbs . With the help of their real estate agent and after several rounds of offering and counter-offering , they have agreed on a price of $343 , 000 with the sellers . The only thing that remains to make their new home a reality is to select a mortgage . Joseph & Anita are unsure about the details of making this type of decision and have come to you for guidance* because of your expertise in this area . Joseph & Anita are both 30 years old and professionally employed . They earn generous salaries and fall into the 28% effective tax bracket on their personal income taxes . They dream long term of retiring* at the age of 65 so they can travel the country to take in all its scenic beauty . It is this dream that drives them to determine a mortgage arrangement that allows them to generate the maximum retirement account balance that they can create to supplement their company sponsored retirement plans . They currently have accumulated $40 ,000 to use for the down payment and closing costs on their house . Any excess amount not used in this way could be used as an initial deposit in their retirement savings account . Alternatively , any excess could be used to make a down payment in excess of the minimum requirement . After studying their budget and spending patterns they have determined that they can afford $2 , 500 / month to cover both mortgage payments and personal retirement savings . They are strongly committed to their retirement travel plans , so any of the $2, 500 not spent on the mortgage will be invested in the retirement savings account . In addition , any tax savings generated through the mortgage will be deposited in the retirement account . Although they anticipate salary increases over the years until they retire , the impact of inflation and changes in lifestyle will offset these to the extent that the $2 , 500 per month can be considered constant over the next 35 years . They have selected a retirement savings vehicle which involves investment in a tax sheltered mutual fund which pays an average of 7% per year compounded monthly . Joseph & Anita , with the help of an investment banker , have studied the history of this fund and are comfortable that the 7% / Yr compounded monthly average return over their 35 year retirement savings horizon is reasonable. Undoubtedly there will be ups and downs but the long term average of 7 $ % appears to be reasonable and stable for planning purposes . Since this is a tax sheltered account , all investments will grow tax free until their retirement .Joseph & Anita have identified four potential mortgage options . They will make their selection from among these four based on your recommendation . Available Mortgages Mortgage ! O 30 year fixed rate @ 7 .58% / Yr / mo , monthly payments , minimum 5% down payment , 1 point closing costs Mortgage ! ! O 15 year fixed rate @ 7 . 13 % / Yr / mo , monthly payments , minimum 10% down payment , 1 point closing costs Mortgage ! !1 O 30 year fixed rate @ 7 . 08% / Yr / 2 - weeks , bi - weekly payments , minimum 5% down payment , 1 point closing costs \\Mortgage IV 15 year fixed rate @ 6 . 63% / Yr / 2 - weeks , bi - weekly payments , minimum 10% down payment , 1 point closing costs General Conditions Applicable to All Mortgages All mortgage calculations are rounded to the nearest penny on a payment by payment basis . All accumulated rounding error is compensated for with an adjustment in the final payment . " 1 point " closing costs equals 1 percent of the loan value . These costs are associated with creating the loan and are due at the time the loan is originated ( along with the down payment ) . They are not tax deductible . Joseph & Anita's timing is such that the annual mortgage cycle will coincide with the calendar year . Tax savings are calculated on a calendar year basis . An amount equal to 1 / 12 th of the annualized savings is deposited in the retirement account each calendar month . Available retirement plan funds are deposited on a monthly basis . The monthly deposit is equal to 1 / 12 th of the annual excess of available over required ( i .e . , excess = 12 * 2 , 500 - ( annual mortgage payments ) . Interest payments on all mortgages are tax deductible . This generates tax savings for each payment based on the following equation : tax savings = effective tax rate* the interest portion of the mortgage payment Deliverables ( Minimum Acceptable ) Description of the general methodology used to address the Morgan's case Discussion of assumptions required / utilized within your methodology Walk through ( including numeric values ) of the application of the methodology to one of the mortgages Summary of the application of the methodology to the remaining mortgages Table of the retirement account balance 35 years hence for each of the mortgages A specific statement of recommendations A detailed amortization schedule for the recommended mortgage