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.reducing the interest rate to 4.5%forgiveness of $100,000 of the principle due and continuing at 6%refinancing the balance due with a new 15 year, 4% mortgageWhich option would minimize his monthly mortgage payment? Assume all refinancing costs will be paid by the government.

the option that will result in a lower monthly payment is the second option that reduces the principal balance by $100,000. The monthly payment will decrease to $2,941.33.

Explanation:

i first prepared an amortization schedule to determine the principal that the neighbor owed after 72 months:

the monthly payment = $3,597.30

principal after 72 months = $548,388

option one:

reducing the interest rate to 4.5% would result in a monthly payment = $3,117.17

option two:

forgiveness of $100,000 of the principle will result in a monthly payment = $2,941.33

option three:

getting a new 15 year mortgage with a 4% interest rate will result in a monthly payment = $4,056.36