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Another set of clients just refinanced their home for $229,500 at 4% for a 30-year fixed...

Another set of clients just refinanced their home for $229,500 at 4% for a 30-year fixed rate mortgage. Their monthly payments are $1,095.67. They have an extra $450 that you have two options for.

  • Your clients can put the extra $450 per month towards paying off the mortgage early.
  • Your clients can invest the $450 in an annuity each month.

Which is the best option? Answer the following questions to help you answer that question.

  1. Calculate how many months early the mortgage would be paid off if the $450 is applied monthly.  
  2. Calculate the total amount of interest paid if extra monthly payments are made.
  3. Calculate the total amount of interest paid if NO extra monthly payments are made.
  4. Read this part clearly: For the mortgage where no extra monthly payments were made, the $450 is invested in an annuity each month earning 7% compounded monthly. For the mortgage where extra payments WERE made, once the mortgage is paid off, they invest the $1095.67+$450 = $1545.67 in an annuity each month earning 7% compounded monthly. Calculate the amount they will have in each account after the 30 years.

Chapter 6 (Mathematics of Finance): MATHEMATICAL APPLICATIONS FOR THE MANAGEMENT, LIFE, AND SOCIAL SCIENCES, 12TH EDITION

Solutions

Expert Solution

Best option: Client can invest $450 in an annuity each month since it has a higher future value of $548,987

jeff jeffy answered 1 year ago
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