Question 24 (16 points

Application of TVM-Mortgage (15 marks)

a) Suppose you purchased a house exactly 5 years ago at a cost of $450,000. Assume that you were able to make a down payment of 20% of the purchase price, and you negotiated a conventional 25-year mortgage for the remaining balance. The fixed rate on the mortgage was 8.25%, and banks are required to compound interest semi-annually.

(i) What is your monthly payment? (3 marks)

(ii) Suppose mortgage rates fell over the five years such that now, rates on 20-year mortgages are presently 5.85%. What is your remaining mortgage balance immediately prior to refinancing? How much have you paid in interest, and how much have you paid in principal over the last 5 years? Calculate your new monthly payments if you do indeed refinance. (3+3+3=9 marks)

(iii) Suppose you decide to continue to pay your initial monthly payments instead of the newly calculated payments. How long will it take you to pay off your mortgage? (3 marks)