Question 4: Application of Time Value of Money to Mortgages Shanna wants to buy a house costing $325,000 and has obtained a loan from TD Bank. A minimum down payment of 15% would be required and the bank will provide the difference. Her grandparent have told her that they will cover her down payment. a. TD Bank has quoted her mortgage interest rate is 4.5%; this rate would be compounded semi- annually, while her payments would be made monthly. What is the effective monthly interest rate (EMR) that she would pay? b. Calculate her monthly mortgage payment, assuming 15% down payment from her grandparents and a mortgage maturity of 25 years. c. Given (b) above, how much of her payment in the 2nd month will go toward repayment of principal and how much is interest payment? d. Assuming that five years later, interest rates drop to 3.2% and Shanna decides to refinance the mortgage. How much would she have paid in interest and how much of the original loan have you paid over the five years? e. Suppose she decides to refinance your mortgage to take advantage of the reduced interest rate. How would her monthly payments change if she could refinance her mortgage at 3.2% (with a 20-year term loan)? f. Suppose she kept her monthly payments at the original amount found in (b) above at 4.5%, but refinanced the at 3.2%, how long would it take her to pay off the mortgage?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
icon
Related questions
Question
Pls. Help me with only e and f part. Only e and f
Question 4: Application of Time Value of Money to Mortgages
Shanna wants to buy a house costing $325,000 and has obtained a loan from TD Bank. A minimum
down payment of 15% would be required and the bank will provide the difference. Her grandparent
have told her that they will cover her down payment.
a. TD Bank has quoted her mortgage interest rate is 4.5%; this rate would be compounded semi-
annually, while her payments would be made monthly. What is the effective monthly interest
rate (EMR) that she would pay?
b. Calculate her monthly mortgage payment, assuming 15% down payment from her
grandparents and a mortgage maturity of 25 years.
c. Given (b) above, how much of her payment in the 2nd month will go toward repayment of
principal and how much is interest payment?
d. Assuming that five years later, interest rates drop to 3.2% and Shanna decides to refinance
the mortgage. How much would she have paid in interest and how much of the original loan
have you paid over the five years?
Suppose she decides to refinance your mortgage to take advantage of the reduced interest
rate. How would her monthly payments change if she could refinance her mortgage at 3.2%
(with a 20-year term loan)?
f. Suppose she kept her monthly payments at the original amount found in (b) above at 4.5%,
but refinanced the at 3.2%, how long would it take her to pay off the mortgage?
Transcribed Image Text:Question 4: Application of Time Value of Money to Mortgages Shanna wants to buy a house costing $325,000 and has obtained a loan from TD Bank. A minimum down payment of 15% would be required and the bank will provide the difference. Her grandparent have told her that they will cover her down payment. a. TD Bank has quoted her mortgage interest rate is 4.5%; this rate would be compounded semi- annually, while her payments would be made monthly. What is the effective monthly interest rate (EMR) that she would pay? b. Calculate her monthly mortgage payment, assuming 15% down payment from her grandparents and a mortgage maturity of 25 years. c. Given (b) above, how much of her payment in the 2nd month will go toward repayment of principal and how much is interest payment? d. Assuming that five years later, interest rates drop to 3.2% and Shanna decides to refinance the mortgage. How much would she have paid in interest and how much of the original loan have you paid over the five years? Suppose she decides to refinance your mortgage to take advantage of the reduced interest rate. How would her monthly payments change if she could refinance her mortgage at 3.2% (with a 20-year term loan)? f. Suppose she kept her monthly payments at the original amount found in (b) above at 4.5%, but refinanced the at 3.2%, how long would it take her to pay off the mortgage?
Expert Solution
steps

Step by step

Solved in 3 steps with 2 images

Blurred answer
Knowledge Booster
Mortgages
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education