2 What are the borrowers actual mortgage payments in the first 5 months 17 Step

2 what are the borrowers actual mortgage payments in

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2: What are the borrower’s actual mortgage payments in the first 5 months?
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17 Step 1: Find the required monthly payment: using five keystrokes Monthly payment: this is the constant amount of money paid by the borrower from month 1 to month 360 N: 360 I: 6/12 PV: 200,000 PMT: ? FV: 0 PMT = -1,199.10
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18 Step 2: Find the interest paid in the first month Interest to be paid can be found by multiplying the beginning balance of the loan by the interest rate INT 1 = BegBal 1 * (i/12) = 200,000*6%/12 =1,000
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19 Step 3: Find the principal payment in the 1 st month The principal payment can be calculated as the difference between monthly payment and interest payment, i.e., PRIN 1 = PMT – INT 1 = $1,199.10 - $1,000 = $199.10
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20 Step 4: Find the ending balance in the 1 st month The balance at the end of the period is to subtract the amount paid toward principal from the beginning balance EndBal 1 = BegBal 1 – PRIN 1 = $200,000 - $199.10 = $199,800.90
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21 Step 5: Find the borrower’s tax deduction and actual payment in the first month Given that tax deduction is only applied to interest payment, the borrower’s tax deduction in the first month is TaxD 1 = INT 1 * TaxRate = $1,000 * 28% = $280 Hence, the actual payment in the first month is: ActPMT 1 =PMT-TaxD 1 = $1,199.10 -$280 = $919.1
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22 Repeat Steps 1 – 5 Observation: tax deduction benefit is substantial! Can you fill out the table by using a financial calculator?
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23 Another Example You bought a house with price of $250,000. Your LTV is 80%, so your loan amount is $200,000. You choose the 30-year mortgage with interest rate 6%. Assuming the total transaction cost is $10,000 and your marginal income tax rate is 25%. Questions: 1. What is your actual mortgage payment in each of the first 3 months? $949.10, $949.35 and $949.60 ; 2. What does your cash flow look like if your loan will be outstanding for only 3 months? From month 0 to month 3: $190,000, - $949.10, -$949.35, -$949.60-$199,399.71. 3. What is the annual effective cost of this loan after-tax if your loan will be outstanding for only 1 month? 67.89%
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24 2013 Tax Rate 2018 Tax Rates Schedule X - Single If taxable income is over But not over The tax is $0 $9,525 10% of the taxable amount $9,525 $38,700 $952.50 plus 12% of the excess over $9,525 $38,700 $82,500 $4,453.50 plus 22% of the excess over $38,700 $82,500 $157,500 $14,089.50 plus 24% of the excess over $82,500 $157,500 $200,000 $32,089.50 plus 32% of the excess over $157,500 $200,000 $500,000 $45,689.50 plus 35% of the excess over $200,000 Over $500,000 no limit $150,689.50 plus 37% of the excess over $500,000 2018 Tax Rates Schedule Y-1 - Married Filing Jointly or Qualifying Widow(er) If taxable income is over But not over The tax is $0 $19,050 10% of the taxable amount $19,050 $77,400 $1,905 plus 12% of the excess over $19,050 $77,400 $165,000 $8,907 plus 22% of the excess over $77,400 $165,000 $315,000 $28,179 plus 24% of the excess over $165,000 $315,000 $400,000 $64,179 plus 32% of the excess over $315,000 $400,000 $600,000 $91,379 plus 35% of the excess over $400,000 $600,000 no limit $161,379 plus 37% of the excess over $600,000
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