The document analyzes four mortgage options for a home purchased for $103,000. It calculates the total savings in a retirement mutual fund over 30 and 35 years for each option. Mortgage 3, with a 30-year fixed rate of 7.08% paid bi-weekly, is determined to have the highest total savings of $1,157,569.857. However, a sensitivity analysis shows that if interest rates on the best option, Mortgage 4, were to increase by 8% then Mortgage 2 would become the optimal choice with the lowest total interest paid.

1. ENGINEERING ECONOMICS
MSE604
FALL 2015
TEAM
Almofawez Latifah
Alrwishid Abeer
Jha Ashish
Naik Gautami
Raisoni Akash

2. THE SMITHSON’S MORTGAGE

3.  MORTGAGE 1: 30 year fixed rate at
7.58%/year/month, monthly payments, minimum
5% down payment, and one-point closing costs
 MORTGAGE 2:15 year fixed rate at
7.13%/year/month, monthly payments, minimum
5% down payment, and one-point closing costs

4.  MORTGAGE 3: 30 year fixed rate at 7.08%/year/2-
weeks, bi-weekly payments, minimum 5%
down payment, and one-point closing costs
 MORTGAGE 4:15 year fixed rate at 6.63%/year/2-
weeks, bi-weekly payments, minimum 5%
down payment, and one-point closing costs

5.  Assuming one point closing cost as x= (103,000-
10,000) + 0.01*x = $94,000 (Round Off)
 A down payment of $10,000 is made.

6. To find the best mortgage option from the
options given. To determine the effects of
mortgage plan choice to retirement savings
account.

7. Examining all our mortgages for calculating the
total mutual fund savings.
Based on the highest savings amount, we
decided our mortgage option.

8. Data given: 30 year fixed rate @ 7.58%/yr. /mo.,
monthly payments, minimum 5% down payment, 1
point closing costs.

9. House cost $ 103,000
i 0.632%
Effective income tax
rate
0.0235
Total Mortgage cost $ 238,452
Monthly Mortgage
cost
$ 662.36
Monthly
saving(Retirement
plan)
$ 337.63
FV Tax saving for 30 $ 21,568.17

10. Calculating the Future worth would give us the
value of amount in mutual fund saving for 30
years
FW (0.75%) = 21568.17 + 337.63(F/A, 0.75%, 360)
= 21568.17 + 337.63(1830.7434)
= 639,682.0922

11. Calculating the Future worth of Mutual fund
saving account for year 30 – 35

12. As there is no mortgage payment after 30 years
the complete $1000 go in the mutual fund saving
account.

13. FW (0.75%) = 639,682.0922(F/P, 0.75%, 60) +
1000(F/A, 0.75%, 60)
= 639,682.0922(1.5657) + 1000(75.4241)
= 1,076,974.352
The total mutual fund saving after the 35 years =
$1,076,974.352

14. MORTGAGE 1 $1,076,974.352
MORTGAGE 2 $1,025,813.886
MORTGAGE 3 $1,157,569.857
MORTGAGE 4 $1,079,980.183

15.  From the calculations, we have found that the
retirement savings are maximized I we select
Mortgage 3.
 Therefore mortgage 3 is a good option.

16.  After calculations, we choose the MORTGAGE 3
option.
 Next better option after Mortgage 3 was
MORTGAGE 1.

17.  TO MINIMIZE THE AMOUNT OF INTEREST
PAID.
 ACCORDING TO CALCULATIONS, INTEREST
PAID IS MINIMUM IF THEY CHOOSE
MORTGAGE 4 AS OPTION, SO PERFORMING
SENSITIVITY ANALYSIS ON MORTGAGE 4.

18.  Adding 2% on interest of Mortgage 4
Total interest Paid= 55689.68
 Adding 5% on interest of Mortgage 4
Total interest Paid=57645

19.  Adding 7% on interest of Mortgage 4
Total interest Paid=58627.87
 Adding 8% on interest of Mortgage 4
Total interest Paid=59367.21

20.  Breakeven occurs at 8% and now “Mortgage 2”
becomes our best option.