Bernie Madeoff pays $250,000 for a new four-bedroom 2,400-square-foot home outside Tonopah, Nevada. He plans to make a 20% down payment, but is having trouble deciding whether he wants a 15-year fixed rate (6.399%) or a

30-year fixed rate (6.874%) mortgage.

a. What is the monthly payment for both the 15- and 30-year mortgages, assuming a fully amortizing loan of equal payments for the life of the mortgage?

b. Assume that instead of making a 20%down payment, he makes a 10% down payment, and finances the remainder at

7.128% fixed interest for 15 years. What is his monthly payment?

c. Assume that the home's total value falls by 25%. If Bernie sells the house at the new market value, what would be his gain or loss on the home and mortgage, assuming all of the mortgage principal remains? Use the same assumptions as in part a.

NOTE for A (Question 1): To solve for the payment value using a financial calculator, you will need to input the values of N, I, and PV. Make sure you enter a zero for FV, because the loan will be paid off at maturity. In this question, compounding is on a monthly basis, but we are adjusting the interest rate to monthly by dividing by 12 and adjusting the number of periods to be monthly by multiplying the number of years by 12, so the P/Y should equal 1.

**********Here's an example of this problem with DIFFERENT numbers (for reference)**************

Bernie Madeoff pays $250,000 for a newfour-bedroom 2,400-square-foot home outsideTonopah, Nevada. He plans to make a 20% downpayment, but is having trouble deciding whether he wants a

15-year fixed rate (6.402%) or a 30-year fixed rate (6.878%) mortgage.

a.What is the monthly payment for both the 15- and 30-year mortgages, assuming a fully amortizing loan of equal payments for the life of themortgage?

b.Assume that instead of making a 20% downpayment, he makes a 10% downpayment, and finances the remainder at 7.129% fixed interest for 15 years. What is his monthlypayment?

c. Assume that thehome's total value falls by25%. If Bernie sells the house at the new marketvalue, what would be his gain or loss on the home andmortgage, assuming all of the mortgage principalremains? Use the same assumptions as in part a.

a)

Monthly Payment for a 15 Year Fully Amortizing Mortgage loan

=$1731.46 (Rounded to two decimal places)

Monthly Payment for a 30 Year Fully Amortizing Mortgage loan

=$1314.31 (Rounded to two decimal places)

b)

Monthly Payment for a 15 Year Fully Amortizing Mortgage loan (If he makes 10% down payment)

=$2038.62 (Rounded to two decimal places)

c)

Explanation:

a)

Given the following data:

Home Value= $250,000

Down Payment (20%)

=250,000*20%

=$50,000

Loan amount =250,000(1-0.20)

=$200,000

Total instalments for a 15 Year Loan = 15 * 12 = 180

Total instalments for a 30 Year Loan = 30 * 12 = 360

Rate for 15 Year loan is 6.402% per annum. Converting it to monthly rate = 6.402%/12

=0.005335

=> 0.5335%

Rate for 30 Year loan is 6.878%per annum. Converting it to monthly rate = 6.878/12 = 0.5732 %

Monthly payment=House price*(1-down payment rate )*(r/12)/(1-1/(1+r/12)^(12*t))

Total Monthly Payment for a 15 Year Fully Amortizing Mortgage loan

200,000*0.005335/(1-1/(1+0.005335)^180 =1731.457959

=$1731.46 (Rounded to two decimal places)

Total Monthly Payment for a 30 Year Fully Amortizing Mortgage loan

200,000*0.005732/(1-1/(1+0.005732)^360 =1314.312024375

=$1314.31 (Rounded to two decimal places)

b)

Home Value= $250,000

Down Payment (10%)

=250,000*10%

=$25000

Loan amount =250,000(1-0.10)

=$225000

Monthly rate 7.129%/12

=0.0059408

Monthly Payment for a 15 Year Fully Amortizing Mortgage loan

225000*0.0059408/(1-1/(1+0.0059408)^180 =2038.620334121

=$2038.62 (Rounded to two decimal places)

c)

Loss=250000*25% =$62,500