Ditech.com

http://youtube.com/watch?v=MSCM039hq7Q&feature=related

Allison Knapp

Emily Molin

Rachel Chadima

Our Objective

We are looking to consolidate our credit card debt, where we look at the cost and benefit from two different options.

We recently saw that commercial, and we thought that the concept sounded too good to be true, so we decided to test it ourselves.

Statement of Problem

Assuming the following financial scenario, calculate the cost/benefit of consolidating your credit card debt in each of the following two

options, (1) refinancing your house, (2) taking out a second mortgage. For each scenario, this

financial analysis should include (1) the reduced monthly payment amount, (2) the

break even point in time, (i.e., the time when the cost of refinancing equals the total amount saved, and (3) the increased interest paid over

the life of the loans.

Existing Financial Data

Original Mortgage Amount $150,000 Length of Loan 30 yrs Remaining Time on Mortgage 25 yrs Existing Mortgage Rate 7.0% Market Value of Home $200,000 Credit Card Debt $25,000 Credit Card APR 25% Combined Credit Card Monthly Payments $1100

Option #1 (Refinancing Home) with the existing credit card debt as well

Given Information: Mortgage Rate

5.5% Loan Limit 90% of Market Value

Length of Loan 30 yrs

Closing Costs $2500+1% of Loan

Our existing financial dataloan balance: left on the 30 year loan is

25 yearsWe calculated the present payments

on our loan for the house through an amortization chart on Excel

P ($) 150,000r (%) 7t (yr) 30times/yr 12

I= 0.005833N= 360

A= 997.9537

I= 209263.3 0

50000

100000

150000

200000

250000

0 100 200 300 400

Month (#)

$principal remainingtotal interesttotal principal

0

2,000

4,000

6,000

8,000

10,000

12,000

0 10 20 30 40

Year

Interest ($)

Series1

Our Evaluation of Option #1Continued:

Next, we had to find the amount of time that it would take to pay off our $25,000 debt owed to the credit card company

Through Excel, we used the Present Value Compound formula to pay off our debt to the credit card company, we found that it would take 31.2 months (or 2.6 years) to pay off the debt in monthly payments of $1,100.

Through our calculations, we realized that we still owe $141,196.90 on our existing mortgage of 30 years.

P 141196.9 $ A 997.95 $i 0.005833 r 7 %/yrn 300 t 25 yr

f 12 freq/yr

Our Evaluation of Option #1Continued:

House only: Reduced monthly payment: $943.65 Our new decreased interest: $173,516.30 Our present debt owed (before refinancing) is

$359,263.30 (+ our credit card debt of $25,000) With Option #1, we know that our new debt owed

including the closing cost and 1% of the loan total $357,816.30 (+ our credit card debt of $25,000)

Therefore, because our new reduced monthly payment is not significant enough to earn back the cost of refinancing ($3,900) we realize that this may not be the smartest idea to refinance our home.

Option #2 (Second Mortgage, Credit Card debt only)

Mortgage Rate 7.5% Length of Loan 15

yrs Loan Limit 90% of

Equity Closing Costs $500

Our Evaluation of Option #2 Equity: The difference between the appraised value of the

home and the outstanding mortgage balance.To calculate our equity we took 90% of the difference between

the market value of our house, and the claims held against it.

$200,000-$141,196.90=$58,803.10*.9= 52,922.79 as the max

amount allowed to take out for a second mortgage.

Although, just because we are allowed this much for a loan, we are still choosing to only take out $25,000 instead of $52,922.79

With our equity, we were able to calculate:

increased monthly payment on top of our existing mortgage: $1,229.70

increased interest on top of existing mortgage: $225,978.86

In addition, we are also paying $1,100 towards our credit card debt for 2.6 years on top of all of debt, which makes our payments per month $2,329.70 for 2.6 years. After that, our payments will decrease to $1,229.70. After 12.4 years, our payments will decrease to $997.95

for the remaining 12.6 years. P ($) 25,000r (%) 7.5t (yr) 15times/yr 12

I= 0.00625N= 180

A= 231.7531

I= 16715.56

-100000-80000-60000-40000-20000

020000400006000080000

100000120000

0 50 100 150 200 250 300 350 400

Month (#)

$

principal remaining

total interest

total principal

-6,000

-5,000

-4,000

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

0 5 10 15 20 25 30 35

Year

Interest ($)

Series1

Break Even Points for Option 1&2:

The costs do not succeed the benefits of Option 1, therefore there is no break-even point.

The amount of time it would take to break even in Option 2 would exceed the amount of time it would take to pay off our original mortgage, therefore, we are choosing to simply stay with our Original mortgage as Option 0.

Our Decision:

Because both of these options do not offer an ideal plan of becoming debt free. It would take many years to “break down the walls of debt,” therefore, we are choosing not to refinance or take out a second mortgage.

Our plan, is to stick to the original mortgage that we have and to slowly pay off our credit card debt in 2.6 years.

In conclusion, we’ve learned that…

We’ve realized that Credit Card companies are out to make money, therefore, it’s not a good idea to take out more loans than you can pay.