Olani and Harriet are trying to determine which one of two mortgage scenarios would help them save the most money with respect to interest charges on their mortgage. The couple needs a mortgage in the amount of $200 000. They are interested in a closed mortgage with a mortgage term of five years. The current interest rate for a five-year mortgage term is 5.14 percent, compounded semi-annually. The couple have also decided that a mortgage amortized over 20 years will best suit their financial planning needs.

Under scenario one, the couple will make regular monthly mortgage payments for the five-year mortgage term. At the end of the term, Harriet expects to receive a $10 000 inheritance that was gifted to her in her aunt's will. The couple are considering applying the $10 000 amount to the mortgage at the end of the mortgage term. Not only will this option reduce the outstanding balance on their mortgage, it will also reduce their mortgage interest charges and the number of years it will take for them to pay off their mortgage.

Although scenario one will help the couple achieve their goal of saving money with respect to their mortgage interest charges, they would also like to consider the option of applying the $10 000 toward a vehicle purchase, since their current vehicle is already nine years old. Under this scenario, the couple would not apply the $10 000 inheritance to the mortgage, but would instead change their mortgage payment frequency to accelerated biweekly. Although an accelerated biweekly payment schedule will also allow the couple to save on their mortgage interest charges, they are not sure if the amount that they would save would be more than what they would save in mortgage interest charges under scenario one.

The couple have asked you to determine their mortgage payment for both scenarios.

How many years would they save off their mortgage, and how much mortgage interest would they save? Use this information to recommend which scenario the couple should pursue. As part of your analysis, complete the table below. Assume that the mortgage interest rate will not change for the duration of the mortgage amortization period.