Question 3: You are planning to buy a new home. The house costs $300,000,

but you only have $25,000 in savings that you can use as down-payment. The

remainder needs to be financed by a mortgage. Your bank offers a 25-year loan,

with fixed annual interest at 7.5, and fixed monthly payments.

1. What are the monthly payments that you have to make for the entire

mortgage to be paid off in 25 years?

2. If you can afford to pay at maximum $2,000 per month, can you afford

the house? If not, how much additional down-payment would it be

required?

3. Now suppose you pay $2,400 per month instead. Can you pay off the

mortgage in 20 years without having to increase your down-payment?

4. The bank also offers an interest-only mortgage, again at 7.5% fixed

annual interest. If you go for this solution, you would have to make fixed

monthly payments, part of which go to the mortgage lender as interest,

while whatever is left would be deposited in a fund that earns interest at

rate R, compounded monthly.

Assume that you maintain the $25,000 down-payment. Consider different

scenarios: monthly payments of $2,000 or $2,400, and length of 20 or 25

years for the loan. For each combination (there are 4), work out the

minimum rate of return R that you must earn on your deposits so that

you will be able to pay off the debt at the end of the contracts lifetime.

Show all of your work. No Excel!