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ACFINA3 T3 AY1718

Homework Answer Key


Chapter 7 Mortgage Markets
5 items- Problem #1, 9, 10, 12, 13

1. You will make a down payment of 20 percent of the purchase price, or you will make a down
payment of $20,000 (0.20 x $100,000) at closing and borrow $80,000 through the mortgage.

a. For your mortgage:


$80,000 = PMT{[1 - (1/(1 + 0.0825/12)30(12))]/(0.0825/12)}
or PMT = $80,000/{[1 - (1/(1 + 0.0825/12)30(12))]/(0.0825/12)}
therefore PMT = $80,000/133.1085 = $601.01

Thus, your monthly payment is $601.01.

b. The 25th payment (335 payments remaining) of $601.01 is split as follows: $540.88 to
interest and $60.13 to principal.

c. The 225th payment of $601.01 is split as follows: $364.32 to interest and $236.69 to
principal.
d. The total payments over the life of the mortgage amount to payments of $216,363.60
($601.01 x 30 x 12): $80,000 to the repayment of principal and $136,363.60 to the payment of
interest.

9. For the either mortgage, you will make a down payment of 20 percent of the purchase price:
or a down payment of $48,000 (0.20 x $240,000) at closing and borrow $192,000 through the
mortgage.

a. Total payments on the 15-year mortgage are $273,297.60, of which $81,279.60 is interest.
This compares to interest of $211,365.60 on the 30-year mortgage (a difference of $130,068.00,
disregarding time value of money). The mortgage borrower’s interest payments are reduced
significantly with the 15-year mortgage relative to the 30-year mortgage.

b. For the 30-year mortgage: $192,000 = PMT{[1 - (1/(1 + 0.0575/12)30(12))]/(0.0575/12)}


or PMT = $192,000/{[1 - (1/(1 + 0.0575/12)30(12))]/(0.0575/12)}
therefore PMT = $192,000/171.3582 = $1,120.46

For the 15-year mortgage: $192,000 = PMT{[1 - (1/(1 + 0.0500/12)15(12))]/(0.0500/12)}


or PMT = $192,000/{[1 - (1/(1 + 0.0500/12)15(12))]/(0.0500/12)}
therefore PMT = $192,000/114.7964 = $1,518.32

The borrower must pay $1,518.32 per month with the 15-year mortgage compared to $1,120.46
with the 30-year mortgage, a difference of $397.86 per month. This may be difficult if the
borrower’s income level is not very high.
ACFINA3 T3 AY1718
Homework Answer Key
Chapter 7 Mortgage Markets

10. You will make a down payment of 20 percent of the purchase price, or you will make a
down payment of $23,000 (0.20 x $115,000) at closing and borrow $92,000 through the
mortgage.

a. If Option 2 is chosen you pay $92,000 x 0.02 = $1,840 in points and receive $90,160 at closing
($92,000 - $1,840), although the mortgage principal is $92,000. To determine the best option,
we first calculate the monthly payments for both options as follows

Option 1: $92,000 = PMT {[1 - (1/(1 + 0.0900/12)30(12))]/(0.0900/12)} => PMT =


$740.25
Option 2: $92,000 = PMT {[1 - (1/(1 + 0.0885/12)30(12))]/(0.0885/12)} => PMT =
$730.35

In exchange for $1,840 up front, Option 2 reduces your monthly mortgage payments by $9.90.
The present value of these savings (evaluated at 8.85 percent) over the 30 years is

PV = $9.90 {[1 - (1/(1 + 0.0885/12)30(12))]/(0.0885/12)} = $1,248.06

Option 1 is the better choice. The present value of the monthly savings, $1,248.06, is less than
the points paid up front, $1,840.

b. If Option 1 is chosen you pay $92,000 x 0.01 = $920 in points and receive $91,080 at closing
($92,000 - $920), although the mortgage principal is $92,000. If Option 2 is chosen you pay
$92,000 x 0.025 = $2,300 in points and receive $89,700 at closing ($92,000 - $2,300). The
difference in savings on the points is $1,380.

To determine the best option, we calculate the monthly payments for both options as follows

Option 1: $92,000 = PMT {[1 - (1/(1 + 0.1025/12)30(12))]/(0.1025/12)} => PMT =


$824.413
Option 2: $92,000 = PMT {[1 - (1/(1 + 0.1000/12)30(12))]/(0.1000/12)} => PMT =
$807.366

In exchange for $1,380 up front, Option 2 reduces your monthly mortgage payments by
$17.047. The present value of these savings (evaluated at 10.00 percent) over the 30 years is

PV = $17.047 {[1 - (1/(1 + 0.1000/12)30(12))]/(0.1000/12)} = $1,942.52

Option 2 is the better choice. The present value of the monthly savings, $1,942.52, is less than
the points paid up front, $1,380.
ACFINA3 T3 AY1718
Homework Answer Key
Chapter 7 Mortgage Markets

12. You will make a down payment of 25 percent of the purchase price, or you will make a down
payment of $43,750 (0.25 x $175,000) at closing and borrow $131,250 through the mortgage.

a. If Option 2 is chosen you pay $131,250 x 0.02 = $2,625 in points and receive $128,625 at
closing ($131,250 - $2,625), although the mortgage principal is $131,250. To determine the best
option, we first calculate the monthly payments for both options as follows

Option 1: $131,250 = PMT {[1 - (1/(1 + 0.0500/12)15(12))]/(0.0500/12)} => PMT =


$1,037.92
Option 2: $131,250 = PMT {[1 - (1/(1 + 0.0475/12)15(12))]/(0.0475/12)} => PMT =
$1,020.90

In exchange for $2,625 up front, Option 2 reduces your monthly mortgage payments by
$17.012. The present value of these savings (evaluated at 4.75 percent) over the 15 years is

PV = $9.90 {[1 - (1/(1 + 0.0475/12)15(12))]/(0.0475/12)} = $2,187.14

Option 1 is the better choice. The present value of the monthly savings, $2,187.14, is less than
the points paid up front, $2,625.

b. If Option 1 is chosen you pay $131,250 x 0.02 = $2,625 in points and receive $128,625 at
closing ($131,250 - $2,625), although the mortgage principal is $131,250. If Option 2 is chosen
you pay $131,250 x 0.03 = $3,937.5 in points and receive $127,312.5 at closing ($131,250 -
$3,937.5). The difference in savings on the points is $1,312.5.

To determine the best option, we calculate the monthly payments for both options as follows

Option 1: $131,250 = PMT {[1 - (1/(1 + 0.0485/12)15(12))]/(0.0485/12)} => PMT =


$1,027.69
Option 2: $131,250 = PMT {[1 - (1/(1 + 0.0468/12)15(12))]/(0.0468/12)} => PMT =
$1,016.17

In exchange for $1,312.50 up front, Option 2 reduces your monthly mortgage payments by
$11.52. The present value of these savings (evaluated at 4.68 percent) over the 15 years is

PV = $11.52 {[1 - (1/(1 + 0.0468/12)15(12))]/(0.0468/12)} = $1,487.94

Option 2 is the better choice. The present value of the monthly savings, $1,487.94, is greater
than the points paid up front, $1,312.50.
ACFINA3 T3 AY1718
Homework Answer Key
Chapter 7 Mortgage Markets

13. You will make a down payment of 20 percent of the purchase price, or you will make a
down payment of $44,000 (0.20 x $220,000) at closing and borrow $176,000 through the
mortgage.

a. For your mortgage:$176,000 = PMT{[1 - (1/(1 + 0.0475/12)15(12))]/(0.0475/12)}


or PMT = $176,000/{[1 - (1/(1 + 0.0475/12)15(12))]/(0.0475/12)}
therefore PMT = $176,000/128.5625 = $1,368.98

Thus, your monthly payment is $1,368.98.

b. Total interest paid on the mortgage is $70,416.40

Amortization Schedule
Cumulative Cumulative Ending
Month Principal Interest
Principal Interest Balance
1 672.31 696.67 672.31 696.67 175,327.69
2 674.97 694.01 1,347.28 1,390.68 174,652.72
3 677.65 691.33 2,024.93 2,082.01 173,975.07
4 680.33 688.65 2,705.26 2,770.66 173,294.74
5 683.02 685.96 3,388.28 3,456.62 172,611.72
6 685.73 683.25 4,074.01 4,139.87 171,925.99
7 688.44 680.54 4,762.45 4,820.41 171,237.55
8 691.16 677.82 5,453.61 5,498.23 170,546.39
9 693.90 675.08 6,147.51 6,173.31 169,852.49
10 696.65 672.33 6,844.16 6,845.64 169,155.84
11 699.40 669.58 7,543.56 7,515.22 168,456.44
12 702.17 666.81 8,245.73 8,182.03 167,754.27

13 704.95 664.03 8,950.68 8,846.06 167,049.32


14 707.74 661.24 9,658.42 9,507.30 166,341.58
15 710.54 658.44 10,368.96 10,165.74 165,631.04
16 713.36 655.62 11,082.32 10,821.36 164,917.68
17 716.18 652.80 11,798.50 11,474.16 164,201.50
18 719.02 649.96 12,517.52 12,124.12 163,482.48
19 721.86 647.12 13,239.38 12,771.24 162,760.62
20 724.72 644.26 13,964.10 13,415.50 162,035.90
21 727.59 641.39 14,691.69 14,056.89 161,308.31
Cumulative Cumulative Ending
Month Principal Interest
Principal Interest Balance
22 730.47 638.51 15,422.16 14,695.40 160,577.84
23 733.36 635.62 16,155.52 15,331.02 159,844.48
24 736.26 632.72 16,891.78 15,963.74 159,108.22

25 739.18 629.80 17,630.96 16,593.54 158,369.04


26 742.10 626.88 18,373.06 17,220.42 157,626.94
27 745.04 623.94 19,118.10 17,844.36 156,881.90
28 747.99 620.99 19,866.09 18,465.35 156,133.91
29 750.95 618.03 20,617.04 19,083.38 155,382.96
30 753.92 615.06 21,370.96 19,698.44 154,629.04
31 756.91 612.07 22,127.87 20,310.51 153,872.13
32 759.90 609.08 22,887.77 20,919.59 153,112.23
33 762.91 606.07 23,650.68 21,525.66 152,349.32
34 765.93 603.05 24,416.61 22,128.71 151,583.39
35 768.96 600.02 25,185.57 22,728.73 150,814.43
36 772.01 596.97 25,957.58 23,325.70 150,042.42

37 775.06 593.92 26,732.64 23,919.62 149,267.36


38 778.13 590.85 27,510.77 24,510.47 148,489.23
39 781.21 587.77 28,291.98 25,098.24 147,708.02
40 784.30 584.68 29,076.28 25,682.92 146,923.72
41 787.41 581.57 29,863.69 26,264.49 146,136.31
42 790.52 578.46 30,654.21 26,842.95 145,345.79
43 793.65 575.33 31,447.86 27,418.28 144,552.14
44 796.79 572.19 32,244.65 27,990.47 143,755.35
45 799.95 569.03 33,044.60 28,559.50 142,955.40
46 803.11 565.87 33,847.71 29,125.37 142,152.29
47 806.29 562.69 34,654.00 29,688.06 141,346.00
48 809.49 559.49 35,463.49 30,247.55 140,536.51

49 812.69 556.29 36,276.18 30,803.84 139,723.82


50 815.91 553.07 37,092.09 31,356.91 138,907.91
51 819.14 549.84 37,911.23 31,906.75 138,088.77
52 822.38 546.60 38,733.61 32,453.35 137,266.39
53 825.63 543.35 39,559.24 32,996.70 136,440.76
54 828.90 540.08 40,388.14 33,536.78 135,611.86
55 832.18 536.80 41,220.32 34,073.58 134,779.68
56 835.48 533.50 42,055.80 34,607.08 133,944.20
57 838.78 530.20 42,894.58 35,137.28 133,105.42
Cumulative Cumulative Ending
Month Principal Interest
Principal Interest Balance
58 842.10 526.88 43,736.68 35,664.16 132,263.32
59 845.44 523.54 44,582.12 36,187.70 131,417.88
60 848.78 520.20 45,430.90 36,707.90 130,569.10

61 852.14 516.84 46,283.04 37,224.74 129,716.96


62 855.52 513.46 47,138.56 37,738.20 128,861.44
63 858.90 510.08 47,997.46 38,248.28 128,002.54
64 862.30 506.68 48,859.76 38,754.96 127,140.24
65 865.72 503.26 49,725.48 39,258.22 126,274.52
66 869.14 499.84 50,594.62 39,758.06 125,405.38
67 872.58 496.40 51,467.20 40,254.46 124,532.80
68 876.04 492.94 52,343.24 40,747.40 123,656.76
69 879.51 489.47 53,222.75 41,236.87 122,777.25
70 882.99 485.99 54,105.74 41,722.86 121,894.26
71 886.48 482.50 54,992.22 42,205.36 121,007.78
72 889.99 478.99 55,882.21 42,684.35 120,117.79

73 893.51 475.47 56,775.72 43,159.82 119,224.28


74 897.05 471.93 57,672.77 43,631.75 118,327.23
75 900.60 468.38 58,573.37 44,100.13 117,426.63
76 904.17 464.81 59,477.54 44,564.94 116,522.46
77 907.75 461.23 60,385.29 45,026.17 115,614.71
78 911.34 457.64 61,296.63 45,483.81 114,703.37
79 914.95 454.03 62,211.58 45,937.84 113,788.42
80 918.57 450.41 63,130.15 46,388.25 112,869.85
81 922.20 446.78 64,052.35 46,835.03 111,947.65
82 925.85 443.13 64,978.20 47,278.16 111,021.80
83 929.52 439.46 65,907.72 47,717.62 110,092.28
84 933.20 435.78 66,840.92 48,153.40 109,159.08

85 936.89 432.09 67,777.81 48,585.49 108,222.19


86 940.60 428.38 68,718.41 49,013.87 107,281.59
87 944.32 424.66 69,662.73 49,438.53 106,337.27
88 948.06 420.92 70,610.79 49,859.45 105,389.21
89 951.81 417.17 71,562.60 50,276.62 104,437.40
90 955.58 413.40 72,518.18 50,690.02 103,481.82
91 959.36 409.62 73,477.54 51,099.64 102,522.46
92 963.16 405.82 74,440.70 51,505.46 101,559.30
93 966.97 402.01 75,407.67 51,907.47 100,592.33
Cumulative Cumulative Ending
Month Principal Interest
Principal Interest Balance
94 970.80 398.18 76,378.47 52,305.65 99,621.53
95 974.64 394.34 77,353.11 52,699.99 98,646.89
96 978.50 390.48 78,331.61 53,090.47 97,668.39

97 982.38 386.60 79,313.99 53,477.07 96,686.01


98 986.26 382.72 80,300.25 53,859.79 95,699.75
99 990.17 378.81 81,290.42 54,238.60 94,709.58
100 994.09 374.89 82,284.51 54,613.49 93,715.49
101 998.02 370.96 83,282.53 54,984.45 92,717.47
102 1,001.97 367.01 84,284.50 55,351.46 91,715.50
103 1,005.94 363.04 85,290.44 55,714.50 90,709.56
104 1,009.92 359.06 86,300.36 56,073.56 89,699.64
105 1,013.92 355.06 87,314.28 56,428.62 88,685.72
106 1,017.93 351.05 88,332.21 56,779.67 87,667.79
107 1,021.96 347.02 89,354.17 57,126.69 86,645.83
108 1,026.01 342.97 90,380.18 57,469.66 85,619.82

109 1,030.07 338.91 91,410.25 57,808.57 84,589.75


110 1,034.15 334.83 92,444.40 58,143.40 83,555.60
111 1,038.24 330.74 93,482.64 58,474.14 82,517.36
112 1,042.35 326.63 94,524.99 58,800.77 81,475.01
113 1,046.47 322.51 95,571.46 59,123.28 80,428.54
114 1,050.62 318.36 96,622.08 59,441.64 79,377.92
115 1,054.78 314.20 97,676.86 59,755.84 78,323.14
116 1,058.95 310.03 98,735.81 60,065.87 77,264.19
117 1,063.14 305.84 99,798.95 60,371.71 76,201.05
118 1,067.35 301.63 100,866.30 60,673.34 75,133.70
119 1,071.58 297.40 101,937.88 60,970.74 74,062.12
120 1,075.82 293.16 103,013.70 61,263.90 72,986.30

121 1,080.08 288.90 104,093.78 61,552.80 71,906.22


122 1,084.35 284.63 105,178.13 61,837.43 70,821.87
123 1,088.64 280.34 106,266.77 62,117.77 69,733.23
124 1,092.95 276.03 107,359.72 62,393.80 68,640.28
125 1,097.28 271.70 108,457.00 62,665.50 67,543.00
126 1,101.62 267.36 109,558.62 62,932.86 66,441.38
127 1,105.98 263.00 110,664.60 63,195.86 65,335.40
128 1,110.36 258.62 111,774.96 63,454.48 64,225.04
129 1,114.76 254.22 112,889.72 63,708.70 63,110.28
Cumulative Cumulative Ending
Month Principal Interest
Principal Interest Balance
130 1,119.17 249.81 114,008.89 63,958.51 61,991.11
131 1,123.60 245.38 115,132.49 64,203.89 60,867.51
132 1,128.05 240.93 116,260.54 64,444.82 59,739.46

133 1,132.51 236.47 117,393.05 64,681.29 58,606.95


134 1,136.99 231.99 118,530.04 64,913.28 57,469.96
135 1,141.49 227.49 119,671.53 65,140.77 56,328.47
136 1,146.01 222.97 120,817.54 65,363.74 55,182.46
137 1,150.55 218.43 121,968.09 65,582.17 54,031.91
138 1,155.10 213.88 123,123.19 65,796.05 52,876.81
139 1,159.68 209.30 124,282.87 66,005.35 51,717.13
140 1,164.27 204.71 125,447.14 66,210.06 50,552.86
141 1,168.87 200.11 126,616.01 66,410.17 49,383.99
142 1,173.50 195.48 127,789.51 66,605.65 48,210.49
143 1,178.15 190.83 128,967.66 66,796.48 47,032.34
144 1,182.81 186.17 130,150.47 66,982.65 45,849.53

145 1,187.49 181.49 131,337.96 67,164.14 44,662.04


146 1,192.19 176.79 132,530.15 67,340.93 43,469.85
147 1,196.91 172.07 133,727.06 67,513.00 42,272.94
148 1,201.65 167.33 134,928.71 67,680.33 41,071.29
149 1,206.41 162.57 136,135.12 67,842.90 39,864.88
150 1,211.18 157.80 137,346.30 68,000.70 38,653.70
151 1,215.98 153.00 138,562.28 68,153.70 37,437.72
152 1,220.79 148.19 139,783.07 68,301.89 36,216.93
153 1,225.62 143.36 141,008.69 68,445.25 34,991.31
154 1,230.47 138.51 142,239.16 68,583.76 33,760.84
155 1,235.34 133.64 143,474.50 68,717.40 32,525.50
156 1,240.23 128.75 144,714.73 68,846.15 31,285.27
157 1,245.14 123.84 145,959.87 68,969.99 30,040.13
158 1,250.07 118.91 147,209.94 69,088.90 28,790.06
159 1,255.02 113.96 148,464.96 69,202.86 27,535.04
160 1,259.99 108.99 149,724.95 69,311.85 26,275.05
161 1,264.97 104.01 150,989.92 69,415.86 25,010.08
162 1,269.98 99.00 152,259.90 69,514.86 23,740.10
163 1,275.01 93.97 153,534.91 69,608.83 22,465.09
164 1,280.06 88.92 154,814.97 69,697.75 21,185.03
165 1,285.12 83.86 156,100.09 69,781.61 19,899.91
166 1,290.21 78.77 157,390.30 69,860.38 18,609.70
Cumulative Cumulative Ending
Month Principal Interest
Principal Interest Balance
167 1,295.32 73.66 158,685.62 69,934.04 17,314.38
168 1,300.44 68.54 159,986.06 70,002.58 16,013.94
169 1,305.59 63.39 161,291.65 70,065.97 14,708.35
170 1,310.76 58.22 162,602.41 70,124.19 13,397.59
171 1,315.95 53.03 163,918.36 70,177.22 12,081.64
172 1,321.16 47.82 165,239.52 70,225.04 10,760.48
173 1,326.39 42.59 166,565.91 70,267.63 9,434.09
174 1,331.64 37.34 167,897.55 70,304.97 8,102.45
175 1,336.91 32.07 169,234.46 70,337.04 6,765.54
176 1,342.20 26.78 170,576.66 70,363.82 5,423.34
177 1,347.51 21.47 171,924.17 70,385.29 4,075.83
178 1,352.85 16.13 173,277.02 70,401.42 2,722.98
179 1,358.20 10.78 174,635.22 70,412.20 1,364.78
180 *1,364.78 5.40 176,000.00 70,417.60 0.00
*The final payment has been adjusted to account for payments having
been rounded to the nearest cent.