Sanjay just bought a house and needs a $300000 mortgage. He has a choice between a mortgage with a 25 year amortization period and one with a 30 year amortization period. Both mortgages require level monthly payments (at the end of each month).

Try to answer the next 2 questions without knowing the interest rate:

a) If both mortgages charge the same interest rate, which one will have lower monthly payments? (the 25 year or the 30 year?)

b) If both mortgages charge the same interest rate, which one will have the larger outstanding balance at the end of 5 years?

c) If the interest rate is 7% compounded semi-annually, what are the monthly payments for each?

d) If the rate for the 25 year mortgage stays the same (as in c), what would the rate (compounded semi-annually) have to be for the 30 year mortgage so the payments were the same as for the 25 year.

e) What is the outstanding balance on each of the mortgages after 4 years?

f) If the rate decreases to 4% (same compounding), and Sanjay refinances at the new lower rate (without penalty) and keeps the same remaining number of payments, which mortgage sees a bigger reduction in payments? By how much?