Question

Mortgage Loans HC)

A $225,000 adjustable-rate mortgage is expected to have the following payments:


Year Interest Rate Monthly Payment
1–5 4% $1,074.18
6–15 6% $1,311.20
16–25 8% $1,484.91
26–30 10% $1,555.99


A fixed-rate mortgage in the same amount is offered for 30 years and 7% interest.

Part A: What is the total cost of the adjustable-rate mortgage? State which technology or method you used. Show or explain all steps. (3 points)

Part B: What is the total cost of the fixed-rate mortgage? State which technology or method you used. Show or explain all steps. (3 points)

Part C: Using your values from parts A and B compare the advantages and disadvantages of the two loan types. (4 points)

Answer 1

Part A:
For the first 5 years:
Monthly payment = $1,074.18
Number of months = 5 years * 12 months/year = 60 months
Total payment = Monthly payment * Number of months
For the next 10 years (6-15 years):
Monthly payment = $1,311.20
Number of months = 10 years * 12 months/year = 120 months
Total payment = Monthly payment * Number of months
For the next 10 years (16-25 years):
Monthly payment = $1,484.91
Number of months = 10 years * 12 months/year = 120 months
Total payment = Monthly payment * Number of months
For the remaining 5 years (26-30 years):
Monthly payment = $1,555.99
Number of months = 5 years * 12 months/year = 60 months
Total payment = Monthly payment * Number of months
Total cost = (1,074.18 * 60) + (1,311.20 * 120) + (1,484.91 * 120) + (1,555.99 * 60)
Total cost ≈ $107,550 + $157,344 + $178,189 + $93,359.4
Total cost ≈ $536,442.4
So, the total cost of the adjustable-rate mortgage is approximately $536,442.4.
Part B:
Total cost = Monthly payment * Number of months
Monthly payment = $1,774.15 (calculated using the formula for a fixed-rate mortgage)
Number of months = 30 years * 12 months/year = 360 months
Total cost = $1,774.15 * 360
Total cost ≈ $639,294
So, the total cost of the fixed-rate mortgage is approximately $639,294.
Part C:
Advantages of adjustable-rate mortgage:
Lower initial monthly payments compared to fixed-rate mortgages during the initial period.
If interest rates decrease in the future, the borrower's payments may also decrease.
May be suitable for short-term homeownership or for borrowers who plan to refinance or sell the property before the adjustable-rate period begins.
Disadvantages of adjustable-rate mortgage:
Payments can increase significantly after the initial period if interest rates rise, leading to payment shock.
Uncertainty about future payments can make budgeting difficult.
Possibility of negative amortization if the interest rate rises significantly.
Advantages of fixed-rate mortgage:
Predictable monthly payments throughout the loan term, making budgeting easier.
Protection against rising interest rates, as the interest rate remains fixed for the entire term.
Suitable for long-term homeownership or for borrowers who prefer stability in their payments.
Disadvantages of fixed-rate mortgage:
Typically higher initial monthly payments compared to adjustable-rate mortgages.
Borrowers may miss out on potential savings if interest rates decrease in the future.
Refinancing to take advantage of lower rates may incur additional costs.

Answer 2

Now I'm going for that walk for my head hurting. Good day.

Answer 3

thank you so much