Question

Mr. H issues a 20 year mortgage of $275,000 at an annual interest rate of 4.4% to buy a house.The mortgage payments are made annually.

1.What is Mr. H's annual payment of principal and interest?

$20,958

$22,425

$18,653

$24,102

2.How much interest does Mr. H pay in the second year of the mortgage?

$11,710

$13,467

$12,530

$10,422

3.Suppose that immediately after making the second annual payment, Mr. H has the opportunity to refinance the remaining mortgage balance at an annual rate of 3.4% for the remaining period of 18 years. What is the largest lump sum refinancing payment that he would be willing to make today to secure the lower cost financing? Assume that he continues to make annual payments on the new mortgage.

$19,440

$25,119

$21,843

$23,372

Answer 1

1)Use pmt formuale in excel.pmt(rate,nper,pv,fv,type)
=pmt(4.4%,20,275000,0,0)=20958
option A
2)use cumipmt formuale in excel.=cumipmt(rate,nper,pv,start,end,type)
=CUMIPMT(4.4%,20,275000,1,2,0)=23810.24. This is for 2 years and for 1 year it is
=CUMIPMT(4.4%,20,275000,1,1,0)=12100
for 2nd year=23810.24-12100=11710
option A
3)the principal left to be paid at end of 2 years can be found using cumprinc formual in excel.
cumprinc(rate,nper,pv,start,end,type)
=18106