Part A) Because interest rates are lower than when she bought her house in 2014, Isabel is planning to refinance her home. Her house is valued at $310,000 and she still owes $170,000 on the principal of the house. That is, the new loan will be for $170,000. Here are Isabel's options: 30 year loan with a rate of 3.25% (compounded monthly) 20 year loan with a rate of 3.2% (compounded monthly) 15 year loan with a rate of 3.1% (compounded monthly) Help her compare the 3 plans by explaining: How much will her monthly payments be for each plan? How much will she pay over the life of the loan for each plan? How much interest will she pay for each plan? Which plan do you recommend to her if she wants to: pay the least amount of interest over the life of the loan? pay the least amount each month? pay the least over the life of the loan? pay the loan off as quickly as possible? Part B) Suppose Isabel has $2000 each month that she can allocate between mortgage payments and retirement. That is, if she pays $1200 toward her mortgage, then she can put the remaining $800 into her retirement account each month. She plans to retire in 30 years. If she goes with the 15 year home loan, then the first 15 years she will have to split the $2000 between mortgage and retirement, but then the last 15 years she can put all $2000 into her retirement account. If she goes with the 20 year home loan, then the first 20 years she will have to split the $2000 between mortgage and retirement, but then the last 10 years she can put all $2000 into her retirement account. If she goes with the 30 year home loan, then she will split the $2000 between mortgage and retirement for all 30 years. Her best retirement option offers her a nominal rate of 5.5%, compounded monthly. Calculate the value of her retirement account in 30 years under each of the 3 plans. Which plan will give her the most in her retirement account? Considering the amount of money she will LOSE through interest on her home loan AND the amount of money she will GAIN on interest through her retirement account, which of the 3 plans is best?

Part A) Because interest rates are lower than when she bought her house in 2014, Isabel is planning to refinance her home. Her house is valued at $310,000 and she still owes $170,000 on the principal of the house. That is, the new loan will be for $170,000. Here are Isabel's options: 30 year loan with a rate of 3.25% (compounded monthly) 20 year loan with a rate of 3.2% (compounded monthly) 15 year loan with a rate of 3.1% (compounded monthly) Help her compare the 3 plans by explaining: How much will her monthly payments be for each plan? How much will she pay over the life of the loan for each plan? How much interest will she pay for each plan? Which plan do you recommend to her if she wants to: pay the least amount of interest over the life of the loan? pay the least amount each month? pay the least over the life of the loan? pay the loan off as quickly as possible? Part B) Suppose Isabel has $2000 each month that she can allocate between mortgage payments and retirement. That is, if she pays $1200 toward her mortgage, then she can put the remaining $800 into her retirement account each month. She plans to retire in 30 years. If she goes with the 15 year home loan, then the first 15 years she will have to split the $2000 between mortgage and retirement, but then the last 15 years she can put all $2000 into her retirement account. If she goes with the 20 year home loan, then the first 20 years she will have to split the $2000 between mortgage and retirement, but then the last 10 years she can put all $2000 into her retirement account. If she goes with the 30 year home loan, then she will split the $2000 between mortgage and retirement for all 30 years. Her best retirement option offers her a nominal rate of 5.5%, compounded monthly. Calculate the value of her retirement account in 30 years under each of the 3 plans. Which plan will give her the most in her retirement account? Considering the amount of money she will LOSE through interest on her home loan AND the amount of money she will GAIN on interest through her retirement account, which of the 3 plans is best?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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30 year loan with a rate of 3.25% (compounded monthly)
20 year loan with a rate of 3.2% (compounded monthly)
15 year loan with a rate of 3.1% (compounded monthly)

Help her compare the 3 plans by explaining:

How much will her monthly payments be for each plan?
How much will she pay over the life of the loan for each plan?
How much interest will she pay for each plan?

Which plan do you recommend to her if she wants to:

pay the least amount of interest over the life of the loan?
pay the least amount each month?
pay the least over the life of the loan?
pay the loan off as quickly as possible?

Part B) Suppose Isabel has $2000 each month that she can allocate between mortgage payments and retirement. That is, if she pays $1200 toward her mortgage, then she can put the remaining $800 into her retirement account each month. She plans to retire in 30 years.

If she goes with the 15 year home loan, then the first 15 years she will have to split the $2000 between mortgage and retirement, but then the last 15 years she can put all $2000 into her retirement account.
If she goes with the 20 year home loan, then the first 20 years she will have to split the $2000 between mortgage and retirement, but then the last 10 years she can put all $2000 into her retirement account.
If she goes with the 30 year home loan, then she will split the $2000 between mortgage and retirement for all 30 years.

Her best retirement option offers her a nominal rate of 5.5%, compounded monthly. Calculate the value of her retirement account in 30 years under each of the 3 plans. Which plan will give her the most in her retirement account? Considering the amount of money she will LOSE through interest on her home loan AND the amount of money she will GAIN on interest through her retirement account, which of the 3 plans is best?

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