When Evelyn and Paul Peters were house hunting 5 years ago, the mortgage rates were pretty high. The fixed rate on a 30year mortgage was 8.75% while the 15year fixed rate was at 8%. After walking through many homes, they finally reached a consensus and decided to buy a $200,000 twostory house in an up and coming suburban neighborhood in the Scarborough. To avoid prepaid mortgage insurance (PMI), the couple had to borrow from family members and come up with the 20% down payment and the additional required closing cost. Since Evelyn and Paul had already accumulated significant credit card debt and were still paying off their college loans, they decided to opt for lower monthly payments by taking a 30year mortgage, despite its higher interest rate. Currently, due to a worsening of economic conditions, mortgage rates have come down significantly and the refinancing frenzy is under way. Evelyn and Paul have seen 15year fixed rates (with no closing cost) advertised at 5% and 30year rates at 5.75%. Evelyn and Paul realize that refinancing is quite a hassle due to all the paper work involved but with rates being down to 30year lows, they dont want to let this opportunity pass them by. About 2 years ago, rates were down to similar levels but they had procrastinated, and had missed the boat. This time, however, the couple called you, the mortgage officer at UTSC bank and locked in the 5%, 15year rate. Nothing was going to stop them from reducing the costs of paying off their dream house this time.

Q1: What is Evelyn and Pauls monthly mortgage payment prior to the refinancing?

Q2: During the first 5 years of owning their dream home, how much money has the couple paid towards the mortgage? What proportion of this amount has been applied towards the interest payment?

Q3: Had the couple opted for the original 15year mortgage proposal (15 year, 8%), how much higher would their monthly payment have been?

Q4. Under the original 15year, 8% mortgage option, how much total interest would have been paid over the life of the loan, assuming that they dont refinance? How does this compare with the total interest that would be paid on the 30year, 8.75% mortgage?

Q5. if the peters had chosen the original 15years, 8% mortgage proposal, how much tax shelter would they have lost (over the last five years) As compared to the 30year,8.75% mortgage ? Assume the peters' tax rate is 30%?

Q6 if the house is currently worth $245,000 and most lenders are willing to lend up to 90% of home value, how much excess equity can peters cash out?

Q7 Should Evelyn and Paul cash out excess equity that they have built up? Assume money market rates are 4%.

Q8 If the peters had increased each payment by one twelfth (since the beginning of the loan), what would their current loan balance amount to?

Q9 Using the assumption in question8 how many total years would it take for peters to pay off the existing loan? Demonstrate your answer with an amortization schedule.

Q10 Should Evelyn and paul go ahead and close the 5%, 15year mortgage? Explain your answer with suitable calculations