1. A $500,000 mortgage is amortized over 20 years. The term of the mortgage is 5 years at a fixed rate of 2.5%. Payments are made monthly.

a) Prepare an amortization table for the first 3 payments of the mortgage.

b) Many financial institutions allow customers to make annual payments of up to 10% of the balance of the mortgage. The payment is applied entirely to the principal. At the beginning of the 3rd year of the mortgage, a payment equal to 10% of the balance is to be made. Determine the amount of the 10% payment.

c) Why is it beneficial to make a pre-payment on your mortgage? Demonstrate and explain using the example above.