Question

1) You took out a 20 year mortgage of $350,000, 3 years ago where you pay $2,450.00 per month. You want to decide on whether you should pay the mortgage off early. What are the factors you should consider in making this decision if your household income is $6,000, and your monthly expenses of $2, 500. Your family includes 3 children who are 12, 10 and 8 years old. Discuss how you would proceed in making such a decision. State all assumptions.

2) Your 60 year old mother is in reasonable good health and has just received her retirement funds of $140,000 from her employer of 40 years. As a financial management student, she trusts you to create an investment portfolio which will be suitable for her. Her tolerance for risk is low. Provide justification for your options.

Answer 1

We have taken a 20 year mortgage of $350,000, 3 years ago, where we pay $2,450 per month.
Our family includes 3 children who are 12, 10 and 8 years.

We assume that the income and expenses are fixed. There will be a monthly saving of $1,050 per month.
Annual savings will be $12,600. We ignore the interest on our savings.
Annual mortage payment = $29,400. Total mortgage payment = 20*29,400 = $588,000.

We have to decide whether we should pay the mortgage early.
We calculate the cumulative savings and the balance mortgage payment for each year.
In Year 14, the cumulative savings of $176,400 is equal to the balance mortgage payment.
We can repay the balance mortgage payment of $176,400 at the end of year 14.