The project: You are advising a young couple, Mr. and Mrs. Smith, regarding a fixed-rate mortgage they have on their first home. They are unsure what would be financially better for them to do. Since they first bought their home, interest rates have declined and they are now both working. They believe that there are two options available to them: 1. Increase their monthly payment so that they would end up paying for their loan faster, 2. Refinance their current mortgage at currently lower interest rates. Mr. and Mrs. Smith bought their first home 13 years ago. At that time the purchase price was $425,000. They put a down payment of 10% and financed the rest with a 30-year fixed-rate mortgage at 6.825%, compounded monthly.

Part A. You should develop an amortization schedule for your clients current mortgage. The schedule should take as inputs the loan amount and the annual interest rate. The schedule should clearly show, for every period, the outstanding loan amount, the payment, the interest paid, and the principal paid in each period. Your workbook should also clearly display the total cost to your clients. Here are some questions you should know the answers to: 1. What is their current outstanding balance? 2. What is the relationship between the current outstanding balance and all the future payments they have to make? 3. What is the relationship between the current outstanding balance and all the past payments they have already made?

Part B. Suppose that Mr. and Mrs. Smith can make additional payments (beyond what is required) of $1,000 every month for the next 3 years. How would these additional payments impact their loan? You should be able to answer the following questions: 1. With the additional payments they should be able to pay off their loan faster. How much faster? 2. Compared to their original loan, how much interest will they pay if they make the additional payments? 3. Suppose that instead of starting the additional payments immediately, they decide to delay them for 5 years and because of the delay they will be able to contribute $1,200 instead of the original $1,000. What impact will this have on the two preceding questions?

Part C. Now consider refinancing the loan. Current interest rate for a 15-year fixed-rate mortgage is 4.25%. What would be the financial implications of refinancing their loan? Assume that the cost of refinancing is $2,250. This refinance cost is a one-time charge to pay for recording and attorney fees. Should Mr. and Mrs. Smith refinance their current loan? What are the financial advantages or disadvantages of refinancing?