Question

In: Finance

A. In discussions with your bank manager, you have been offered a 20 year mortgage with...

A. In discussions with your bank manager, you have been offered a 20 year mortgage with interest rates fixed for the next 5 years at 4.5% (when the rates will be reset), or an alternative of a mortgage with interest rates fixed over the whole term of the mortgage at a rate of 5.5%. Explain why you might not want to take advantage of the lower rates on the 5 year fixed option

Solutions

Expert Solution

From risk management point of view it is better to have fixed cash flows for amortization as the period is very long.

The images below show interest payment for amortization for 5.5% fixed for 20 years and 4.5% fixed for 5 years and interesting at 0.5% each year afterwards.

Even interest paid is more for floating rate


Related Solutions

You plan to buy a house for $210,000. You have been offered a 20 year mortgage...
You plan to buy a house for $210,000. You have been offered a 20 year mortgage with a rate of 4.8%. You make a $30,000 down payment. Closing costs are 5%. In the Amortization schedule for the first month, the interest, in dollars and cents, will be $_____ In the Amortization schedule for the first month, payment on principal, in dollars and cents, will be $______ In the Amortization schedule for the first month, the balance on the loan at...
You need a 20-year, fixed-rate mortgage to buy a new home for $220,000. Your mortgage bank...
You need a 20-year, fixed-rate mortgage to buy a new home for $220,000. Your mortgage bank will lend you the money at a 7 percent APR for this 240-month loan. However, you can afford monthly payments of only $950, so you offer to pay off any remaining loan balance at the end of the loan in the form of a single balloon payment. Required: How large will this balloon payment have to be for you to keep your monthly payments...
You have been offered the following 2 fixed-rate mortgage loans to finance the acquisition of your...
You have been offered the following 2 fixed-rate mortgage loans to finance the acquisition of your first apartment building that costs $1.4 million. Explain which loan you should select considering you intend to sell the property in 5 years. Please show all relevant work.a.$1m 15-year FRM @ 7.8% that fully amortizes w/ 2 point in origination feesb.$1m 15-year FRM @ 8.4% that fully amortizes w/ 1 points in origination fees
You have just been offered a job. Your base salary will be $90,000 per year and...
You have just been offered a job. Your base salary will be $90,000 per year and the first year’s annual salary will be received one year from the day you start working. You receive a bonus immediately of $12,500. Your salary will grow 4 percent per year and you will receive a bonus of 10 percent of your salary. You expect to work 30 for years. Your discount rate is 11 percent. What is the present value of your offer?...
You have just been offered a job. Your base salary will be $95,000 per year and...
You have just been offered a job. Your base salary will be $95,000 per year and the first year's annual salary will be received one year from the day you start working. You receive a bonus immediately of $12,500. Your salary will grow 4 percent per year and you will receive a bonus of 10 percent of your salary. You expect to work for 30 years. Your discount rate is 10 percent. What is the present value of your offer?
You have just been offered a job. Your base salary will be $90,000 per year and...
You have just been offered a job. Your base salary will be $90,000 per year and the first year’s annual salary will be received one year from the day you start working. You receive a bonus immediately of $12,500. Your salary will grow 4 percent per year and you will receive a bonus of 10 percent of your salary. You expect to work 30 foryears. Your discount rate is 11 percent. What is the present value of your offer? Group...
Mortgage Department Suppose you are the manager of a mortgage department at a savings bank. Under...
Mortgage Department Suppose you are the manager of a mortgage department at a savings bank. Under the state usury law, the maximum interest rate allowed for mortgages is 10 percent compounded annually. Required: A. If you granted a $50,000 mortgage at the maximum rate for 30 years, what would be the equal annual payments? B. If the current market internal rate on similar mortgages is 12 percent, how much money does the bank lose by issusing the mortgage described in...
To finance your new​ house, you have obtained a 35 year $750,000 mortgage. The bank has...
To finance your new​ house, you have obtained a 35 year $750,000 mortgage. The bank has offered you an interest rate of 5.7​%. You​ can't decide on a payment frequency. Complete the following table to help you make a decision. number of payment per year mortgage payment 12 24 26 52
You have been hired as the new Loan Department Manager in a bank that has been...
You have been hired as the new Loan Department Manager in a bank that has been having troubles in the loan department as identified by the federal auditors. You task is to clean the procedures, the lending policies and reduce the problematic loans so that profitability is restored and the CAMELS score improves. Please take me through the process and set up clear policies and procedures
You have been appointed as a project manager for a large bank in Dubai. The board...
You have been appointed as a project manager for a large bank in Dubai. The board of directors can’t decide how to analyse the project stakeholders. They ask you to compare the Salience Model to the Stakeholder Rating Model. You must refer to the example of stakeholders in your comparison.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT