Question 2: Breaking a Mortgage (8 marks)

Consider entering into the following mortgage:

Size of initial loan = $450,000 (ignore any possible insurance)

3-year term.

Closed, fixed rate of interest equal to 4.5% APR.

20-year amortization period.

Monthly payments.

Part A: Please compute the monthly payments and determine how much principal is left after one year of payments (assuming no change in interest rates).

Part B: Assume that, after one year of payments, interest rates drop to 3.65% APR. Would you break the mortgage and refinance at the new rate? Please show all relevant calculations and ex-plain your choice. Do not forget to state any assumptions you make in arriving at your answer.