QUESTIONS

1. What are the monthly payments for the 4 traditional mortgages? If the Storys want the lowest monthly payment, which alternative is the best?

2. Assuming that they plan to live in the house only for five years and that they are only interested in monthly payments, prepare an amortization table for the first five years for the 4 alternative loans. Calculate the total amount paid, the total interest paid, the total principal paid and the remaining balances after 60 months. Which alternative has the lowest amount of interest paid in those 5 years? Which alternative has the highest amount of principal paid (the lowest remaining balance)?

3. Assume the Storys get paid biweekly and are really interested in the smart loans. How long would it take to pay off the 4 traditional mortgages if they choose the smart payments plan? How much money do they save by doing smart loans compared to traditional mortgages?

Hadi Elbanna, MBA. School of Business Administration University of Houston-Victoria FINC 3304 Business Finance Fall 2015 Email: elbannaha@uhv.edu Mini Project 1 (Time Value of Money) General Instructions: You'll have to use Microsoft Excel to solve this assignment and you'll submit your Excel file. You should use Excel's formulas and built-in functions to perform your project. Online students must upload Excel file into Blackboard Mini Project 1 is due on Sunday, October 11, 2015 at 11:00 PM. Your project should be well-organized. The style and organization part of the project account for 10 percent of the grade. The project will be submitted individually. Notes about Excel: You have to use Excel to actually calculate numeric results. Nevertheless, to show the procedure used, please clearly identify the names of your variables (both input and output). In case a formula is needed, please type it near your input variables. Highlight or put a box around your main answers. Write your name and date on each sheet. Suggestions for people with problems understanding how to solve this assignment: Review the \"Loan Amortization Using a Spreadsheet\" example on page 149. You should use Excel's formulas and built-in functions to perform your project as shown in the example. Review the Self-Test at the end of each chapter. Ask your classmates or email me with your question. FINC 3304 - Business Finance Mini Project 1 HOME MORTGAGE COMPARISON Mark and Alicia Story, recently married, have decided that they want to buy a $600,000 house. They are planning to give 20% down payment and finance the rest with a mortgage. Mark and Alicia are now ready to meet with Chris Vaughan, the loan officer for First United National Bank. The meeting is to discuss the mortgage options available to the company to finance the property. Chris begins the meeting by discussing a 30-year mortgage. The loan would be repaid in equal monthly installments. Because of the previous relationship between Mark and the bank, there would be no closing costs for the loan. Chris states that the APR of this loan would be 4.125 percent. Alicia asks if a shorter mortgage loan is available. Chris says that the bank does have 25-year, 20-year and 15-year mortgages available at 4.0, 3.75 and 3.5 percent respectively. Mark decides to ask Chris about a \"smart loan\" he heard about from a friend. A smart loan works as follows: Every two weeks a mortgage payment is made that is exactly one-half of the traditional monthly mortgage payment. Chris informs him that the bank does have smart loans. The APR of smart loan would be the same as the APR of the traditional loans. Mark nods his head. He then asks whether this is the best mortgage option available to him in order to save interest payments. Chris suggests that a bullet loan, or balloon payment, would result in the greatest interest savings. At Alicia's prompting, she goes on to explain a bullet loan. The monthly payments of a bullet loan would be calculated using a 10-year traditional mortgage at a rate of 3.375 percent. In this case, there would be a 5-year bullet. This would mean that the Storys would make the mortgage payments for the traditional mortgage for the first five years, but immediately after they make the 60th payment, the bullet payment would be due. The bullet payment is the remaining principal of the loan. Chris then asks how the bullet payment is calculated. Chris tells him that the remaining principal can be calculated using an amortization table, but it is also the present value of the remaining 5 years of mortgage payments for the 30-year mortgage. Alicia has also heard of an interest-only loan and asks if this loan is available and what the terms would be. Chris says that the bank offers an interest-only loan with a term of 10 years and an APR of 3.5 percent. She goes on to further explain the terms. Mark would be responsible for making interest payments each month on the amount borrowed. No principal payments are required. At the end of the 10-year term, the Storys would repay the amount they borrowed. However, the Storys can make principal payments at any time. The principal payments would work just like those on a traditional mortgage. Principal payments would reduce the principal of the loan and reduce the interest due on the next payment. Mark and Alicia are satisfied with Chris's answers, but they are still unsure of which loan they should choose. They have asked Chris to answer the following questions to help them choose the correct mortgage. FINC 3304 - Business Finance Mini Project 1 QUESTIONS 1. What are the monthly payments for the 4 traditional mortgages? If the Storys want the lowest monthly payment, which alternative is the best? 2. Assuming that they plan to live in the house only for five years and that they are only interested in monthly payments, prepare an amortization table for the first five years for the 4 alternative loans. Calculate the total amount paid, the total interest paid, the total principal paid and the remaining balances after 60 months. Which alternative has the lowest amount of interest paid in those 5 years? Which alternative has the highest amount of principal paid (the lowest remaining balance)? 3. Assume the Storys get paid biweekly and are really interested in the smart loans. How long would it take to pay off the 4 traditional mortgages if they choose the smart payments plan? How much money do they save by doing smart loans compared to traditional mortgages? HINTS: Use one Excel sheet for each loan mentioned in the case (4- sheets). Once all numbers are available, create tables to compare all options in order to answer the case questions. FINC 3304 - Business Finance Mini Project 1