Ferman Claudia MTH 154 Activity 5 PDF

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This document has the answers to a MTH 154 assignment....

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Name: Claudia Ferman

A Case Study of Paying Extra Principal on a Mortgage Place your answers from the procedure and analysis here:

1.

Required Monthly Payment = $

1049.21_______________

2. a. 1/12 of the required monthly payment = $ 87.43

_______

b. By adding this 1/12 to the required payments, the Jeffersons plan to pay $

3.

1136.64______each month.

Number of years to pay off loan = _____24.5______________________

Thomas Family th

Jefferson Family

1/12 of Monthly Payment $87.43 Rates Annuity Amount in 360 Months 0% $31475 1% $36688 2% $43079 3% $50949 4% $60681 5% $72764 6% $87825 7% $106662

Monthly Payment + Extra 1/12th $1136.64 Rates Annuity Amount in 360 Months $75018 0% $77087 1% $79230 2% $81452 3% $83755 4% $86142 5% $88618 6% $91185 7%

8%

8%

$130302

$93848

Answer the following reflection questions: 1. What assumptions may not necessarily be valid for a typical family regarding both the savings plan rate?

loan rate and

On a mortgage rate there are fixed and variable interest rates. If it is a variable interest rate that interest rate can change over the mortgage period. Along with that credit score also has an influence on what kind of interest rate you will receive from a bank. So interest rates vary from family to family. For the saving plan you are not guaranteed to save the amount you plan on. On some months you can save more or save less. If you are paying extra on your mortgage payment then not necessarily you will be able to pay that extra amount every month. This is where unexpected expenses comes into play.

2. Discuss some basic pros and cons to these two very different approaches the Thomas and Jefferson families made with their extra monthly payment. Consider various ideas such as possible changes in the family’s employment situation, market performance, tax deductions, etc. Pro Thomas approach: The Pros to this approach is that you have more saved up in case of an emergency or loss of employment. Also if market conditions are good and you earn a high rate of return on the saving investment than you have a potential to make more money than the Jeffersons by the end of the 30 years. Con Thomas approach: You are in a mortgage for a longer period. If the market conditions aren’t good yo also run the risk of saving less than the jeffersons by the end of the 30 years. When it comes time to sell your house you will have more principality that you owe compared to the Jefferesons so your profit will be less. Pro Jeffersons approach: In a mortgage for a shorter time. By the end of the 30 year mortgage you can have a decent amount saved up even if markets are slow. When you sell the house you will gain more profit because you have a lower principality Con Jeffersons approach: In the short term you will have less money saved up in case of an emergency or loss of job. Even if markets are good and have a high rate of return it won’t affect your savings so much

since it will be in the market for a short period.

3. Comment on the merits of the advice you read from the two financial columnists. The merits is that for young people it is best to pay the minimum on your mortgage and invest and save the rest. The reason being is because the longer your money is in the market the better chances you have to gain a lot more money. Because even if the markets are not high all the time the times they are provide you the best gains. For older people paying of the mortgage faster can be ideal because you might have enough saved up for an emergency already and getting rid of the debt can be a priority because you do not know how much longer you will work or start getting sick. A house is a safer asset than putting your money in the market. Also since your money will be in the market for a shorter time than you will have less opportunity to compound it. The risk is also higher the older you get to keep money in the market.

4. If you were to pay extra principal on a mortgage, when is the best time to do it (early or later in the loan process) and why? Early. Because at the beginning of every loan your monthly payment will mostly be going toward interest accrued. If you pay more early on then you lower your principality which lowers the amount of interest paid.

5. When you pay extra principal on a loan, describe whether you feel you are actually earning interest on that money or not. That is, how does the old adage “a penny saved is a penny earned” apply in this context? In this context you save money by paying extra principal because your interest accumulated is less in the following month. So you are saving money in the interest that you are paying. And when it comes to a 30 year mortgage the savings can be in the thousands. So in my mind we are earning interest on that money in the form of paying less accumulated interest in the life of the loan....