*28. Your friend tells you he has a very simple trick for taking one-third off the time...

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*28. Your friend tells you he has a very simple trick for taking one-third off the time it takes to repay your mortgage: Use your Christmas bonus to make an extra payment on January 1 of each year (that is, pay your monthly payment due on that day twice).

Assume that the mortgage has an original term of 30 years and an APR of 12%.

a. If you take out your mortgage on January 1, so that your first payment is due on February 1, and you make your first extra payment at the end of the first year, in what year will you finish repaying your mortgage?

b. If you take out your mortgage on July 1 (so the first payment is August 1) and make the extra payment each January, in how many months will you pay off your mortgage?

c. How will the amount of time it takes to pay off the loan given this strategy vary with the interest rate on the loan?

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Fundamentals Of Corporate Finance

ISBN: 9780134475561

4th Edition

Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford

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