Case 8

In: Business and Management

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Loan Amortization Solution for Case 8

Total amount borrow = $200,000 x 0.80 = $160,000

1) What is Evelyn and Paul’s monthly mortgage payment prior to the refinancing?

PVA = W x 1 - 1 where PVA is the present value (1 + R)N W is the amount received each quarter R R is the interest rate N is the period

160,000 = W x 1 - 1 (1 + (0.0875/12)30x12 (0.0875/12) W = $1,258.720649

The monthly mortgage payment is $1,2580.72

2) During the first 5 years of owing their dream home, how much money has the couple paid towards the mortgage? What proportion of this has been applied toward interest?

Payment towards the mortgage = $75,523.20
Interest payment = $68,625.53

3) Had the couple opted for the original 15-year mortgage proposal (15 year, 8%), how much higher would their monthly payment have been?

$160,000 = W x 1 - 1 (1 + (0.08/12)15x12 (0.08/12) W = $1,529.04

4) Under the original 15-year, 8% mortgage option, how much total interest would have been paid over the life of the loan? How does this compare with the total interest that would be paid on the 30-year, 8.75% mortgage?

Original 15-year 8% mortgage option, total interest = $115,228.35
The 30-year, 8.75% mortgage, total interest = $293,140.33

The total interest to be paid under the original 15-year, 8% mortgage option is much lower than the 30-year.

5) If the Peters had chosen the original 15-year, 8% mortgage proposal, how much tax shelter would they have lost (over the last five years) as compared to the 30-year, 8.75% mortgage? Assume the Peter’s tax rate is 30%.

$1,529.04 x 12 x 5…...

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