The monthly payments for four traditional mortgages

Assignment Help Financial Management
Reference no: EM131302346

Mark and Alicia Story, recently married, have decided that they want to buy a $600,000 house. They are planning to give 20% down payment and finance the rest with a mortgage. Mark and Alicia are now ready to meet with Chris Vaughan, the loan officer for First United National Bank. The meeting is to discuss the mortgage options available to the company to finance the property.

Chris begins the meeting by discussing a 30-year mortgage. The loan would be repaid in equal monthly installments. Because of the previous relationship between Mark and the bank, there would be no closing costs for the loan. Chris states that the APR of this loan would be 4.125 percent. Alicia asks if a shorter mortgage loan is available. Chris says that the bank does have 25-year, 20-year and 15-year mortgages available at 4.0, 3.75 and 3.5 percent respectively.

Mark decides to ask Chris about a "smart loan" he heard about from a friend. A smart loan works as follows: Every two weeks a mortgage payment is made that is exactly one-half of the traditional monthly mortgage payment. Chris informs him that the bank does have smart loans. The APR of smart loan would be the same as the APR of the traditional loans. Mark nods his head. He then asks whether this is the best mortgage option available to him in order to save interest payments.

Chris suggests that a bullet loan, or balloon payment, would result in the greatest interest savings. At Alicia's prompting, she goes on to explain a bullet loan. The monthly payments of a bullet loan would be calculated using a 10-year traditional mortgage at a rate of 3.375 percent. In this case, there would be a 5-year bullet. This would mean that the Storys would make the mortgage payments for the traditional mortgage for the first five years, but immediately after they make the 60th payment, the bullet payment would be due. The bullet payment is the remaining principal of the loan. Chris then asks how the bullet payment is calculated. Chris tells him that the remaining principal can be calculated using an amortization table, but it is also the present value of the remaining 5 years of mortgage payments for the 30-year mortgage.

Alicia has also heard of an interest-only loan and asks if this loan is available and what the terms would be. Chris says that the bank offers an interest-only loan with a term of 10 years and an APR of 3.5 percent. She goes on to further explain the terms. Mark would be responsible for making interest payments each month on the amount borrowed. No principal payments are required. At the end of the 10-year term, the Storys would repay the amount they borrowed. However, the Storys can make principal payments at any time. The principal payments would work just like those on a traditional mortgage. Principal payments would reduce the principal of the loan and reduce the interest due on the next payment.

Mark and Alicia are satisfied with Chris's answers, but they are still unsure of which loan they should choose. They have asked Chris to answer the following questions to help them choose the correct mortgage.

QUESTIONS

1. What are the monthly payments for the 4 traditional mortgages? If the Storys want the lowest monthly payment, which alternative is the best?

Reference no: EM131302346

Questions Cloud

Five general principles of prescription in your own words : In minimum 350 words, single-spaced, Font Times Roman and Font size 12. References should be given in APA style. 1. Write down the five general principles of prescription in your own words?
What the break-even point is and where this is for company : Explain what the Break-Even point is, and where this is for the Company. Should they try to get a price higher than $.80 per lb. to improve profits? Why, or why not?
What is its current market value : You have just purchased a three-month, $520,000 negotiable CD, which will pay a 5.5 percent annual interest rate. If the market rate on the CD rises to 6 percent, what is its current market value? If the market rate on the CD falls to 5.25 percent, w..
Calculate the total wages for the week : How is exception-handling using try/except similar to and different from handling exceptional cases using ordinary decision structures (variations on if)?
The monthly payments for four traditional mortgages : Mark and Alicia Story, recently married, have decided that they want to buy a $600,000 house. They are planning to give 20% down payment and finance the rest with a mortgage. What are the monthly payments for the 4 traditional mortgages? If the Story..
How do ponzi schemes and pyramid schemes differ : How do Ponzi schemes and pyramid schemes differ? How are they similar? What should be done to ensure large-scale fraud such as Ponzi schemes and pyramid schemes do not happen in the future?
Calculate the corresponding grade : A certain CS professor gives 5-point quizzes that are graded on the scale 5-A, 4-B, 3-C, 2-D, 1-F, 0-F. Write a program that accepts a quiz score as an input and uses a decision structure to calculate the corresponding grade.
How security best practices can be used and implemented : Why an assessment should be performed to determine a baseline for the security in the company? How security best practices can be used and implemented to maintain systems and network security?
Write a simulation that implements an msk transmitter : Write a simulation that implements an MSK transmitter, AWGN channel, and matched filter receiver. Perform a Monte Carlo simulation for this system to determine the SNR required to achieve a BER of 10-2.

Reviews

Write a Review

 

Financial Management Questions & Answers

  Incorrect given the treasury quotes

Which statement is INCORRECT given the following Treasury quotes? The dealer is willing to sell this bond to you for 150.750% of par.

  Current ratio indication of short-term liquidity

The financial manager is worried that the current ratio indication of short-term liquidity is so bad that it will be difficult to obtain additional funding. Therefore, the financial manager takes out a $100 million loan payable in a year and day and ..

  Managements opportunity cost of funds

The ACME Parcel Service is considering the purchase of a delivery truck costing $40,000 and generating cash inflows of $8,000 every year while still in operating condition. If management's opportunity cost of funds is 12 percent, how long must the tr..

  The return on a cash-and-carry gold is loaned

Suppose the gold spot price is $1700/oz, the 1-year forward price is 1760.54, and the continuously compounded risk-free rate is 4%. Calculate the following: the lease rate δ= 1T 1n F0,TS B. the return on a cash-and-carry if gold cannot be loaned C. t..

  Uses only equity capital-two equally-sized divisions

Duval Inc. uses only equity capital, and it has two equally-sized divisions. Division A's cost of capital is 10.0%, Division B's cost is 14.0%, and the corporate (composite) WACC is 12.0%. All of Division A's projects are equally risky, as are all of..

  Receiving the dividend-what rate of return would you earn

The stock of Cleaning Corp. is currently selling for $25 a share. The company is expected to pay a dividend of $0.75 at the end of this year. If you bought Macbeth stock today and sold it for $29 after receiving the dividend, what rate of return woul..

  Bank pays a nominal interest rate

Non Annual Compounding It is now January 1. You plan to make a total of 5 deposits of $100 each, one every 6 months, with the first payment being made today. The bank pays a nominal interest rate of 12% but uses semiannual compounding. You plan to le..

  Diversifiable and nondiversifiable risks

Diversifiable and nondiversifiable risks. In broad terms, why is some risk diversifiable? Why are some risks nondiversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of systematic ..

  Annual debt service payment

Assume the rate on the issuance of $100m of 100-year bonds is 7.5%; the annual debt service payment would be $7.505m. How high would the interest rate have to be on 30-year bonds for the annual debt service payment to be the same for both financings?

  What is the market price of the bond

A tax-exempt bond was recently issued at an annual 10 percent coupon rate and matures 15 years from today. The par value of the bond is $1000. If required market rates are 10 percent, what is the market price of the bond? If required market rate fall..

  Dollar value of ending inventory under variable costing

A company produces a single product. Variable production costs are $13.8 per unit and variable selling and administrative expenses are $4.8 per unit. Fixed manufacturing overhead totals $54,000 and fixed selling and administration expenses total $58,..

  Initial margin requirements

Ted’s Corporation stock is selling for $50 per share. Ted pays no dividends. Initial margin requirements are 50%, and maintenance margin requirements are 30%. You can borrow from your broker at 7% per year on margin debt, but the broker pays nothing ..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd