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ID: 1110133 • Letter: C
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"Refinancing Possibility" Please respond to the following:
The current economic downturn has created quite a bit of publicity about the number of bankruptcies and foreclosures in the U.S. Consider an instance in which the mortgage holder is willing to work with the debtor to refinance the property so that all interests are protected. Devise the best possible refinancing solution in the event of a mortgage of $100,000, property value of $80,000, and the ability of the debtor to pay back $60,000 over time
Explanation / Answer
Adjustable rate mortgage can be seen as the best refinancing alternative to the mortgage. This can be seen as a loan option in which the interest rate can be changed periodically and the mortgage rate can be attached to a certain economic indicator such as treasury bills.
For saving the interest which can prove a greater risk for the organization, interest rate swapping can be utilized by the individuals. An interest rate swap can be seen as a liquid financial derivative instrument in which an agreement is made between two parties to exchange the interest rate cash flows which are dependent on a certain principal sum from a fixed rate or a floating interest rate.
Addressing of all the obligations can be ensured with the help of interest rate swapping and thus the firm will be able to manage the mortgage effectively.
To value the loan so as to know the best device to use, the loan – to –value ratio will be used
Loan-to-value (LTV) ratio:
Loan to value ratio=Loan amount/appraised
=100,000/80000=1.25
In case LVR is more than 1, it implies a manageable loan.