Question

This assignment is a little different than the other assignments, because this one is fairly computational. This assignment is one big question with 13 parts – each part builds on the previous part. The assignment is set up so you can see the previous and later parts of the assignment, but can submit one part at a time.

1. [2 points] Suppose that 15 years ago you bought a home for $500,000, paying 20% as a down payment, and financing the rest at 5% interest for 30 years. How much money did you pay as your down payment?
2. [2 points] How much money was your existing mortgage (loan) for?
3. [2 points] What is your current monthly payment on your existing mortgage? Note: Carry at least 4 decimal places during calculations, but round your final answer to the nearest cent.
4. [2 points] How much total interest will you pay over the life of the existing loan?
5. [2 points] This year (15 years after you first took out the loan), you check your loan balance. Only part of your payments have been going to pay down the loan; the rest has been going towards interest. You see that you still have $271,536 left to pay on your loan. Your house is now valued at $650,000. How much of the original loan have you paid off? (i.e, how much have you reduced the loan balance by?
6. [2 points] How much money have you paid to the loan company so far (over the last 15 years)?
7. [2 points] How much interest have you paid so far (over the last 15 years)?
8. [2 points] How much equity do you have in your home (equity is value minus remaining debt)?
9. [2 points] Since interest rates have dropped, you consider refinancing your mortgage at a lower 3% rate. If you took out a new 30 year mortgage at3% for your remaining loan balance, what would your new monthly payments be?
10. [2 points] How much interest will you pay over the life of the new loan?
11. [2 points] Notice that if you refinance, you are going to be making payments on your home for another 30 years. In addition to the 15 years you’ve already been paying, that’s 45 years total. How much will you save each month because of the lower monthly payment?
12. [2 points] How much total interest will you be paying (consider the interest you paid over the first 15 years of your original loan as well as interest on your refinanced loan)?
13. [1 point] Now the non-computational question: Does it make sense to refinance? (There isn’t a correct answer to this question. Just give your opinion and your reason.)

Answer 1

1]

Down payment = cost of house * down payment %

Down payment = $500,000 * 20% = $100,000

2]

Mortgage loan amount = cost of house - down payment

Mortgage loan amount = $500,000 - $100,000 = $400,000

3]

Monthly loan payment is calculated using PMT function in Excel :

rate = 5% / 12   (converting annual rate into monthly rate)

nper = 30*12 (30 year loan with 12 monthly payments each year)

pv = 400000 (loan amount)

PMT is calculated to be $2,147.29

А1 f =PMT(5%/12,30*12,400000) : A ($2,147.29)! x B C D E 1

4]

Total interest paid = (monthly payment * total number of payments) - loan amount

Total interest paid = ($2,147.29 * (30*12)) - $400,000

Total interest paid = $373,023.14