Part 1

You are planning to purchase a house that will require a mortgage of $300,000.

You find 2 mortgage offers both at the same rate of 2.5%.One is a 30-year mortgage and the other is a 20-year mortgage.

1.You know, without any computation, that the 30-year mortgage will have lower monthly payments than the 20-year mortgage since the rates are the same.A friend advised that before taking the 30-year mortgage offer, you do some mathematical calculations to see if your budget can handle the extra amount of monthly payment for the 20-year mortgage.

a.What would be the monthly payment on the 30-year mortgage?

b.What would be the monthly payment on the 20-year mortgage?

2.You ask your friend what advantage there is to be paying more per month on the 20-year mortgage.Your friend replies that it is all about total interest.

a.What is the total interest you would pay over the full term of the 30-year mortgage?

b.What is the total interest you would pay over the full term of the 20-year mortgage?

3.After you purchase the house, you decide to do some remodeling in the kitchen.You ask your parents if they would lend you money, but you insist on paying them interest.The agreement is that they will lend you $5000.00 at a simple interest rate of 2% per year.Once the interest amounts to $250, you agree to pay them back the $5000 plus the $250 interest.After how many months will you have to pay them back?

4.Suppose instead that the $5000.00 was invested in a savings account that paid 2% interest compounded quarterly.How much interest would be earned after 2.5 years?