Question

1. What is amortization? Describe other types of loan arrangements. If you could afford to pay cash for a home, is it worth it to take a mortgage out anyway? If no, why not. If yes, why. Here are the variables: 30 year amortized mortgage at 5% fixed Investment opportunity at 3.5% fixed Price of the home is $500,000. You’ll either invest $400,000 and make a down payment on the house of $100,000 and mortgage the rest. Hint: Find out if the interest earned on the investment is more or less than the interest paid on the mortgage. Show your work. I am not grading you on whether you get it right, more that you do the time value of money calculations.

Answer 1

Amortization refers to cost of loan to be paid over a period of time
Future value of investment of 400000 after 30 years	FV = pv*(1+r)^n PV = 400000 r= 3.5% n = 30	400000*(1.035)^30	1122717.482
Monthly payment toward mortgage	Using PMT function in MS excel	PMT(5%,30,400000,0)	($26,020.57)
total payment made towards mortgage	Yearly payment*no of years	26020.57*30	($780,617.22)
total interest payment on mortgage	780617.22-400000	380617.22
total interest earned on fixed investment	1122717.48-400000	722717.48
Difference in interest earned over interest paid	722717.48-380617.22	342100.26
It is better to avail the mortgage and rest amount should be deposited