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Your neighbor approached you about a dilemma he has with his mortgage. He purchased his house in 2006 with a $600,000, 6% fixed rate, 30

Your neighbor approached you about a dilemma he has with his mortgage. He purchased his house in 2006 with a $600,000, 6% fixed rate, 30 year mortgage. Then the great recession hit. Today his house is estimated to be worth less than the balance he owes on the mortgage. Furthermore, he was forced to take a new job at 20% less than what he was earning when he purchased the house. Here in 2012, 72 months later, he is contemplating entering into a mortgage modification program sponsored by the government. It offers 3 options.

  1. reducing the interest rate to 4.5%
  2. forgiveness of $100,000 of the principle due and continuing at 6%
  3. refinancing the balance due with a new 15 year, 4% mortgage

Which option would minimize his monthly mortgage payment? Assume all refinancing costs will be paid by the government.

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