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You are in the process of obtaining a 25-year fixed rate mortgage on a house that you are buying. The mortgage amount is $350,000 and

You are in the process of obtaining a 25-year fixed rate mortgage on a house that you are

buying. The mortgage amount is $350,000 and the mortgage rate is 7.2%. (This is the

nominal annual rate.) Assume that all monthly payments are made at the end of every

month.

a. What is the monthly payment on the mortgage?

b. What percentage of your payments the second year goes toward repayment of

principal?

c. After 3 years (36 months), what will be the remaining balance on your mortgage?

d. What is the effective annual rate of the mortgage?

e. Another bank has calculated that based on your financial situation, your household

can obtain a mortgage with a maximum payment of $2,000 a month. However, this

bank will offer you a 30-year fixed-rate mortgage with a nominal annual rate of

7.8%. Again, assume that all payments are made at the end of the month. Given

these terms, what is the maximum amount that you can borrow from this bank?

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