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    Loan Amortization: June and Patrick Baker

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    Loan Amortization

    When June and Patrick Baker were "house hunting" five years ago, the mortgage rates were pretty high. The fixed rate on a 30-year mortgage was 8.75% while the 15-yearfixed rate was at 8%. After walking through many homes, they finally reached a consensus and decided to buy a $150,000 two-story house in an up and coming suburban neighborhood in the Mid-West. 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 costs.

    Since June and Patrick had already accumulated significant credit card debt and were still paying off their college loans, they decide to opt for lower 30-year mortgage payments, despite its higher interest rate.

    Currently, due to a worsening of economic conditions, mortgage rates have come down significantly and the "refinancing" frenzy is underway. June and Patrick have been seen 5 year fixed rates (with no closing costs) advertised at 6% and 30-year rates at 6.75%. June and Patrick realize that refinancing is quite a hassle due to all paper work involved but with rates being down to 30-year lows, they don't 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 their mortgage officer at the Uptown Bank and locked in the 6%, 15 year rate.

    Questions:
    1) What is June and Patrick's monthly mortgage payment prior to the refinancing?
    2) During the first 5 years, how much has the couple paid towards the mortgage? What proportion of this was applied toward interest?
    3) Had the couple opted for the 15-year mortgage for their refinancing, how much higher would their monthly payment be?
    4) Under a 15-year mortgage, how much would the interest component be?

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