Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

6. Sam and Ella have just bought a home. They take out a $250,000 mortgage and have decided that they can afford $1650 a month

image text in transcribed
6. Sam and Ella have just bought a home. They take out a $250,000 mortgage and have decided that they can afford $1650 a month as the mortgage payment. Here are the interest rates that Sam and Ella have been able to obtain over the years (we will assume this is a USA mortgage, so that interest rates compounded monthly are allowed that will make the calculations a bit easier for you): D12 = 6% Locked in for 5 years Di2 = 5,4% Locked in for 3 years 2 = 4.8% Locked in for 5 years After exactly 10 years of monthly payments, Sam and Ella realize that mortgage rates have dropped again and they wish to finance their mortgage. (a) Calculate the outstanding balance after 10 years using the retrospective method. (4 marks) For the last 3 questions, you will need your answer from (a). If you are unable to get the answer, or are not confident in your answer, you can use $170,000 as the outstanding balance. (b) How many more $1650 monthly payments are required to fully pay off the mortgage at the rate of interest that is in effect at this time? What would be the size of the drop payment needed one month later to fully pay off the mortgage? (3 + 1 = 4 marks) (e) Since Sam and Ella are wishing to refinance their mortgage before the end of the current 5 year locked in period, the mortgage company will charge them a penalty. The penalty is equal to 3 times one month's interest on the current outstanding balance. What is the size of the penalty? (1 mark) (d) Calculate what the mortgage interest rate.j2, has to drop to in order for it to be beneficial for Sam and Ella to refinance. Make sure you take into consideration the penalty. Assume that Sam and Ella will continue making monthly payments of $1650. For the term remaining, use you answer to (b), rounded to the nearest month. (4 marks) 6. Sam and Ella have just bought a home. They take out a $250,000 mortgage and have decided that they can afford $1650 a month as the mortgage payment. Here are the interest rates that Sam and Ella have been able to obtain over the years (we will assume this is a USA mortgage, so that interest rates compounded monthly are allowed that will make the calculations a bit easier for you): D12 = 6% Locked in for 5 years Di2 = 5,4% Locked in for 3 years 2 = 4.8% Locked in for 5 years After exactly 10 years of monthly payments, Sam and Ella realize that mortgage rates have dropped again and they wish to finance their mortgage. (a) Calculate the outstanding balance after 10 years using the retrospective method. (4 marks) For the last 3 questions, you will need your answer from (a). If you are unable to get the answer, or are not confident in your answer, you can use $170,000 as the outstanding balance. (b) How many more $1650 monthly payments are required to fully pay off the mortgage at the rate of interest that is in effect at this time? What would be the size of the drop payment needed one month later to fully pay off the mortgage? (3 + 1 = 4 marks) (e) Since Sam and Ella are wishing to refinance their mortgage before the end of the current 5 year locked in period, the mortgage company will charge them a penalty. The penalty is equal to 3 times one month's interest on the current outstanding balance. What is the size of the penalty? (1 mark) (d) Calculate what the mortgage interest rate.j2, has to drop to in order for it to be beneficial for Sam and Ella to refinance. Make sure you take into consideration the penalty. Assume that Sam and Ella will continue making monthly payments of $1650. For the term remaining, use you answer to (b), rounded to the nearest month. (4 marks)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Income Tax Fundamentals 2013

Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill

31st Edition

1111972516, 978-1285586618, 1285586611, 978-1285613109, 978-1111972516

More Books

Students also viewed these Finance questions

Question

define sickness absence and sickness presence;

Answered: 1 week ago

Question

Identify the critical elements in a performance management system

Answered: 1 week ago

Question

Identify the skills necessary for effective coaching

Answered: 1 week ago