Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Problem 2: Fixed rate mortgage You take out a 15 year fixed rate mortgage for $410,000, and buy down the interest rate by purchasing two

image text in transcribed
image text in transcribed
Problem 2: Fixed rate mortgage You take out a 15 year fixed rate mortgage for $410,000, and buy down the interest rate by purchasing two points. After the points, the interest rate you agree to is 4.125% per annum. You subsequently retain this mortgage for 3 years, before prepaying it. You incur a $6,000 prepayment penalty when you prepay the loan, because of a clause in the mortgage note contract. A. What is the monthly payment on this mortgage? How much ofthe initial payment is interest, and how much is principal? B. Over the three years, what is the total of all the interest payments you make on this loan? What is the total value of the principal payments? C. What is the effective interest rate (or yield) on this mortgage, given that you decided to prepay the loan after three years? D. Given that you paid off the loan after three years, would you have been better off (in terms of the effective interest rate) if you hadn't paid points but taken a 4.5% interest rate? How would this answer change if you had held the loan until maturity instead? E. What types of borrowers would generally not want to buy points on a fixed rate mortgage? F. Is a prepayment penalty common for this type of loan? Explain. [Although not required, we recommend you check that you can calculate these answers both in Excel and using yourfinancial calculator.]

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

Exchange Rates and International Finance

Authors: Laurence Copeland

6th edition

273786040, 978-0273786047

More Books

Students also viewed these Finance questions

Question

Find the ABCD parameters for the circuit in figure.

Answered: 1 week ago