Principles of Finance
Class/Homework
Assignment-Mortgages.
This assignment will get you acquainted with the relationship between
mortgage rates, points, and monthly payments.
1. On the Internet, go to http://www.hsh.com
At that
site, find the average national fixed rates. Should be right
there. You will need to print these out and attach with your homework.
What is the average 30 year, 15
year, and 1 year ARM. Write these down below.
30 year average rate:
______________
15 year average rate: ______________
1 year ARM: _____________
2. What are points and what is the relationship between points and the
mortgage rate? DO NOT ASK ME. Look it up. Google it!
3. What does APR stand for? ___________________________________________________
What does ARM stand for? ___________________________________________________
4. For the 30-year average fixed rate that you found at the above site, what
would be your monthly payment if you took out a 30-year loan on $150,000?
PV = ______________
FV = ______________
I/Y = ______________
N = ________________
PMT = ____________
5. If you decided to pay 1 point, you could reduce your rate
by .25% (For example: from 6% to 5.75%.) Assume you
decided to pay one point on the loan above. Using your lowered mortgage rate,
calculate your monthly payment on the 30-year $150,000 loan.
PV = ______________
FV = ______________
I/Y = ______________
N = ________________
PMT = ____________
6. What would be your up front payment for question 4 if you paid 1 point? i.e. What is the cost of the point?
7. Now, you should find the monthly payment calculated from question 5 to be
less than the monthly payment calculated from question 4. How much did you save
per month by taking the point?
8. Based on question 7, how long do you need to hold on to the loan to justify
taking the loan with the one point? I.E. How long does
it take you to recoup the cost of the point via the lower mortgage rate?
Specify in months. Ex. Say you save
$10 and the point cost you $200, it would take 20 months to recoup the
cost. This is not the answer by the
way.
9. Now determine the monthly mortgage payment if you took out the 15-year loan instead (ignore the point).
PV = ______________
FV = ______________
I/Y = ______________
N = ________________
PMT = ____________
10. What is the monthly payment based on the 1 year ARM?
PV = ______________
FV = ______________
I/Y = ______________
N = ________________
PMT = ____________
11. Calculate your total payments from the 15-year loan and for the 30-year loan without the point. How much do you save in interest by taking the 15-year loan? Don't forget the total interest for each loan is the total amount paid minus the principal of $150,000.
Total paid on 30 year loan = ______________ - $150,000 = total interest paid = ____________________
Total paid on 15 year loan = ______________ - $150,000 = total interest paid = ____________________
Would save ___________________ in interest.
12. What is the risk of taking out a one year ARM?