Lecture 3- Mortgage Example #3

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

This preview shows pages 1–2. Sign up to view the full content.

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

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

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...
View Full Document

{[ snackBarMessage ]}

### Page1 / 2

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

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online