effects of changing conditions Mortgages – Day II effects of changing conditions

Mortgage Details Some more mortgage definitions: Open Mortgage – Closed Mortgage – Variable Rate Mortgage – Fixed Rate Mortgage –

Calculating Total Interest CASE STUDY : A bank offers a mortgage rate of 6.5%/a amortized over 25 years. If the mortgage is for $280000, what would the monthly payments be? Their payments would be $ 300 6.5 280000 - The total interest paid would be: 12 2

Calculating Total Interest CASE STUDY : A bank offers a mortgage rate of 2.5%/a amortized over 25 years. If the mortgage is for $280000, what would the monthly payments be? Their payments would be $ 300 2.5 280000 - The total interest paid would be: = 12 2

Effects of Changing Conditions Using the previous case study, we will examine the effects of the following options. In each situation calculate the new payment per period and the total interest paid. Changing Amortization Period Change the amortization period from 25 to 20 years. Changing Payment Frequency Change the payment frequency from monthly to weekly (still use a 25 year amortization period) Changing Payment Amount Change the payment amount to $2000 or $1300 per month and recalculate the number (N) of payments required. Calculate total interest paid. Effect of Lump Sum Payments After 5 years (60 payments), make a lump sum deposit of $25000, recalculate the number of payments remaining, assuming you still pay $1254.31 per month.

Changing Conditions : Case 1 Changing Amortization Period Change the amortization period from 25 to 20 years. Their payments would be $ 2.5 280000 - The total interest paid would be: = 12 2

Changing Conditions : Case 2 Changing Payment Frequency Change the payment frequency from monthly to weekly (still use a 25 year amortization period) Their payments would be $ (per week) 2.5 280000 - The total interest paid would be: = 52 2

Changing Conditions : Case 3 Changing Payment Amount Change the payment amount to $1300 per month and recalculate the number (N) of payments required. Calculate total interest paid. The number of $1300 payments would be ? 2.5 280000 - The total interest paid would be: = 12 2

Changing Conditions : Case 3 Changing Payment Amount Change the payment amount to $2000 per month and recalculate the number (N) of payments required. Calculate total interest paid. The number of $2000 payments would be ? 2.5 280000 - The total interest paid would be: = 12 2

Changing Conditions : Case 4 Effect of Lump Sum Payments After 5 years (60 payments), make a lump sum deposit of $25000, recalculate the number of payments remaining, assuming you still pay $1875.51 per month. After 5 years the remaining balance would be: $ 2.5 280000 -1254.31 After a lump sum payment the new balance would be: ? 12 2

Changing Conditions : Case 4 (cont’d) Effect of Lump Sum Payments… Now calculate the number of payments required to pay off the balance assuming the same payment of $1254.31. The total number of payments remaining is : ? 2.5 211985.92 -1254.31 The total interest paid is 12 2

Summary : Changing Conditions Scenario Payment Amount # Payments # Years Total Interest Paid High Rate $1875.51 300 25 Original $1254.31 20 yr. amortization $1481.97 240 20 Weekly payments $289.22 1300 Monthly payments of $1300 $1300 285.6 23.8 Monthly payments of $2000 $2000 123.05 10.25 Lump sum payment $25000 268.27 22.36