Mortgage Options Analysis

I would want an interest rate that compounds annually. With an annual loan, it doesn’t compound that often which is less interest.

1. If you are borrowing money and paying interest, would you prefer an interest rate that compounds annually, quarterly, or daily? Why? (2-4 sentences. 1.0 points)

Home ownership is the American dream! It is one of the most costly purchases an individual or family can make in their lifetime. Some people save until they have cash to purchase however, many people borrow money from a bank or lending institution; when a person borrows money to purchase a home the loan is called a mortgage. The lender is called the mortgagee and the borrower is called the mortgagor; banks have several different types of mortgages: fixed rate mortgage, adjustable rate mortgage, investment mortgage and much more. Borrowers have to undergo the lender underwriting process to show financial capability of repaying the mortgage (Makarov & Plantin, 2013). In this article I will use a fictitious person named “Julianna,” she is in the process of buying her first home at age 30; I will be her lender and will use mathematical procedures to find out what is her down payment, principle, installment payment, points (closing cost), mortgage maturity value and total interest paid.

1. The total cost of interest is equal to the total of all monthly payments:

c. Smaller payments mean more time in debt. d. Your lower interest loans also get rolled into the deal so you end up with minimal savings.

13. What is the formula for the Present Value (PV) for a finite stream of cash flows (1 per year) that lasts for 10 years?

4. (TCO C) Alan and Barbara are in the process of purchasing their first home. However, they cannot decide whether a 15-year fixed-rate mortgage or a 30-year fixed-rate mortgage is best for them. They have decided to finance $200,000 and can get the 15-year mortgage at 4.5% and the 30-year mortgage at 5%. (35 points total)

What annual interest rate is needed to produce $200,000 after five years if only $100,000 is invested?

(a) In this question, two new payment alternatives have been mentioned. The first option (Payment B) consists of seven equal payments of $3,000 at the beginning of each year; this can be

FVN = FV1= PV × (1 +I)N = $500 x (1 + 0.08) = $500 x 1.08 = $540

a. How much would the payment be if rate of interest is 5% and you only financed the truck for 48 months?

At an interest rate of 15% per year (3.75% for three months, the amount to borrow equals

After the calculations you end up coming out with a rate of 14.87%. The third and final part of question three asks what rate you will need if the interest is compounded semiannually. All you have to do is double the amount of terms and you will come out with a lower number of 7.177%. Since the interest is compounded semiannually that means that you will need to times that number by two and you come out with your final number of 14.35%.

These amounts of tax savings should be added to the incremental cost savings for each year to come up with the total cash inflows. The present value of all these cash inflows and outflows can be calculated by discounting them at 12.19%. This rate is calculated by assuming that the purchasing power parity holds in this scenario. The company can do the feasibility analysis by looking at both from the subsidiary’s and parent’s perspective by assuming that the purchasing power parity holds. Hence, this rate can be regarded as opportunity cost of investment because it is the second best alternative for the company for investment purposes.

The semi-annual compounded interest rate is 5.2% (a six-month discount rate of 5.2/2 = 2.6%). (15 points)