1. Copyright © Cengage Learning. All rights reserved. 5 MATHEMATICS OF FINANCE Read and take notes on p. 296

2. Copyright © Cengage Learning. All rights reserved. 5.3 Amortization and Sinking Funds

3. 3 Financing a Home

4. 4 An adjustable-rate mortgage (ARM) is a home loan in which the interest rate is changed periodically based on a financial index. For example, a 5/1 ARM is one that has an initial rate for the first 5 years and thereafter is adjusted every year for the remaining term of the loan. Similarly, a 7/1 ARM is one that has an initial rate for the first 7 years and thereafter is adjusted every year for the remaining term of the loan.

5. 5 Applied Example 5 – Home Affordability Suppose the bank has also offered the Jacksons a 7/1 ARM with a term of 30 years and an interest rate of 5.70%/year compounded monthly for the first 7 years. If the Jacksons limit their monthly payments to 2000/month, what is the maximum amount they can?

6. 6 Applied Example 6 – Adjustable Rate Mortgages Five years ago, the Campbells secured a 5/1 ARM to help finance the purchase of their home. The amount of the original loan was $350,000 for a term of 30 years, with interest at the rate of 5.76% per year, compounded montly for the first 5 years. The Campbells’ mortgage is due to reset next month, and the new interest rate will be 6.96% per year, compounded monthly. a.What was the Campbells’ monthly mortgage payment for the first 5 years? b.What will the Campbells’ new monthly mortgage payment be (after the reset)? By how much will the monthly payment increase?

7. 7 Practice p. 303 Self-Check Exercises #1 p. 306 #Exercises 49