Question

Bernie Madeoff pays ​$250 comma 000 for a new​ four-bedroom 2,400-square-foot home outside​ Tonopah, Nevada. He plans to make a 20​% down​ payment, but is having trouble deciding whether he wants a 15​-year fixed rate ​(6.402​%) or a 30​-year fixed rate ​(6.877​%) mortgage. a. What is the monthly payment for both the 15​- and 30​-year ​mortgages, assuming a fully amortizing loan of equal payments for the life of the​ mortgage? b. Assume that instead of making a 20​% down​ payment, he makes a 10​% down​ payment, and finances the remainder at 7.126​% fixed interest for 15 years. What is his monthly​ payment? c. Assume that the​ home's total value falls by​ 25%. If Bernie sells the house at the new market​ value, what would be his gain or loss on the home and​ mortgage, assuming all of the mortgage principal​ remains? Use the same assumptions as in part a

Answer 1

15-year mortgage

Monthly loan payment is calculated using PMT function in Excel :

rate = 6.397% / 12   (converting annual rate into monthly rate)

nper = 15*12 (15 year loan with 12 monthly payments each year)

pv = 240000 * 80% (loan amount = price of home * down payment %)

PMT is calculated to be $1,661.67

30-year mortgage

Monthly loan payment is calculated using PMT function in Excel :

rate = 6.874% / 12   (converting annual rate into monthly rate)

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

pv = 240000 * 80% (loan amount = price of home * down payment %)

PMT is calculated to be $1,261.18