Lecture 3- Mortgage Example #3

Lecture 3- Mortgage Example #3 - = $ 765. Problem #2: You...

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Mortgage Example #3 – Globe and Mail Sept 25/06 Consider a $175,000 mortgage, 25 year amortization period, started interest rate of 5.3%. Compare a regular monthly mortgage payment with an interest-only mortgage payment. Solution : a) Regular Mortgage Payment Step 1 : Find the semi-annual period rate: Semi-annual Period rate = 5.3% / 2 = .0265 = 2.65% Step 2 : Find EAR: EAR = (1 + .0265) 2 = 0.053702 or 5.3702% Step 3 : Find monthly (or period) rate I m = (1 + 0.053702) 1/12 - 1 = 0.0043687 or 0.43687% per month Step 4 : Calculate the number of months in 25 years n = 12 * 25 = 300 months or periods Step 5 : Calculate monthly payment: Note: We are looking at a PVA problem where we are asked for the monthly PMT variable: Using your calculator: n= 300 (25 years x 12 months/yr) i = 0.43687% per month PV = 175,000 FV = 0 COMP PMT -> PMT = $ 1048 Thus, the monthly payment on the mortgage is $1048 per month b) Interest Only Mortgage Payment From above, i m = 0.43687% per month Monthly Payment = I m x Loan amount = .0043687 x 175,000
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Unformatted text preview: = $ 765. Problem #2: You are planning to buy a new condominium in Toronto. The Condo is worth $220,000; you will put a 25% down payment and obtain a 25-year fixed rate mortgage at 6.25% (APR semi-annually compounded) for the rest. Assuming that monthly payments begin in one month, how much interest will you pay (in dollars) over the life of the loan? A) $128,259.14 B) $159,105.03 C) $110,358.81 D) $143,517.24 Solution: 1 . Find Semi-annual rate: i s = 6.25% -> .0625/2 = .03125 2. Find EAR: EAR = (1.03125) 2 1 = .0634766 3. Find the monthly rate: i m = (1+ 0.0634766) 1/12-1 = 0.005142. 4. Find Number of months in mortgage: n = 25yrs x 12mths/yr = 300 months 5. Find the monthly payment with a PV of $165,000 ( $220,000 x 75% ) Using your calculator: PV= -165,000 , n=300, i=0.5142%, FV=0, PMT=? Answer= $1,080.35 6. The total interest paid is given by: Interest paid = Total payments Principal = $1080.35 x 300 $165,000 = 159,105.03...
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Lecture 3- Mortgage Example #3 - = $ 765. Problem #2: You...

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