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Calculate Fixed and Adjustable Rate Mortgages Questions
The purpose of this assignment is to demonstrate that the student understands how to calculate both a fixed rate and an adjustable rate mortgage under a variety of terms and variables.
Submit to your instructor your answers to the questions in Part One and Part Two. Since this assignment is based on calculations, you are required to show all your work in detail for each answer by listing the components for each calculation and explaining the calculation taking place to reach the answer submitted. This may be done on a Word document or an Excel spreadsheet. Make sure that all work is shown in your submission for full credit.
Calculate Fixed and Adjustable Rate Mortgages Questions
Part One
Please answer the following questions for a fixedrate mortgage as a fully amortizing mortgage loan made for $175,000 at 4.5% interest for 30 years.
What is the monthly payment for a Constant Payment Mortgage (CPM) loan?
What will the total of payments be for the entire 30 year period? Of this total, how much will be interest?
Assume the loan is repaid in the end of 8 years. What will be the outstanding loan balance paid at that time? How much total interest will have been collected by then?
Assume the borrower chooses to reduce the loan balance by $5000 at the end of year 8. What will be the new loan maturity date assuming that loan payments are not reduced?
Calculate Fixed and Adjustable Rate Mortgages Questions
Part Two
Please answer the following questions for an adjustablerate mortgage under the following conditions: an Adjustable Rate Mortgage (ARM) for $140,000 is made at the time when the expected start rate is 6%. The loan will be made with the teaser rate of 3% for the first year, after which, the rate will be reset. The loan is fully amortizing, has a maturity of 25 years, and will be made monthly.
What will the monthly payments (principle and interest) be during the first year?
Assuming that the reset rate is 7% at the beginning of Year (BOY) 2, what will the monthly payments be (principle and interest) beginning in Year 2 through Year 25?
By what percentage will monthly payments increase from Year 1 to Year 2?
What if the reset date is three years after loan origination, and the reset rate is 8%. What will the monthly payments be (principle and interest) beginning in year 4 through year 25?
Since this assignment is based on calculations, you are required to show all your work in detail for each answer by listing the components for each calculation and explaining the calculation taking place to reach the answer submitted. This may be done on a Word document or an Excel spreadsheet. Make sure that all work is shown in your submission for full credit.
Calculate Fixed and Adjustable Rate Mortgages Questions
Part One
PROBLEM #1:
Determine the correct formula to use to solve for the monthly payment.
Plug in each of the corresponding figures.
REMINDER: multiply the # of years times 12, and input the total # of months.
REMINDER: divide the interest rate by 12, and input the monthly rate.
Solve for payment (this is a hint regarding which formula to use).
Calculate Fixed and Adjustable Rate Mortgages Questions
PROBLEM #2:
From Problem #1 above, multiply the answer by the total number of months the loan is payable. That is the total amount paid over the life of the loan (both principal and interest).
From the total loan payments, subtract the principal amount.
The resulting sum equals the total interest to be paid over the life of the loan.
Calculate Fixed and Adjustable Rate Mortgages Questions
PROBLEM #3:
Determine the correct formula to use to solve for the mortgage balance.
Plug in each of the corresponding figures.
REMINDER: multiply the # of years times 12, and input the total # of months.
REMINDER: divide the annual interest rate by 12, and input the monthly rate.
Solve for mortgage balance / future value (this is a hint regarding which formula to use). You will need this number for Step #5 below.
Calculate the total payments by multiplying the monthly payment by the number of months.
REMINDER: multiply the # of years times 12 to get the # of months.
Add the total payments (step 4) to the mortgage balance (step 3) and then subtract the original principal.
The resulting sum equals the total interest collected for 8 years.
Calculate Fixed and Adjustable Rate Mortgages Questions
PROBLEM #4:
Determine the correct formula to use to solve for the mortgage balance.
Plug in each of the corresponding figures.
REMINDER: multiply the # of years times 12, and input the total # of months.
REMINDER: divide the interest rate by 12, and input the monthly rate.
Solve for mortgage balance / future value (this is a hint regarding which formula to use).
Subtract the $5,000 loan principal reduction to arrive at the new balance.
Determine the correct formula to use to solve for the number of months (this is a hint regarding which variable to solve for).
Plug in each of the corresponding figures.
REMINDER: use the new loan balance you calculated in Step #4 above.
Solve for maturity (number of months left to pay the mortgage).
Calculate Fixed and Adjustable Rate Mortgages Questions
Part Two
TO SOLVE PROBLEMS #1 – #3:
Create an Excel® table with the following 7 columns:
Year
BOY (beginning of year) Balance
Annual Interest Rate
Monthly Interest Rate
Payments
Annual Amortization
EOY (end of year) Balance
In the first row (Year #1)
Insert figures into the following fields: BOY, Annual Rate
Calculate the Monthly Rate (hint: this is the annual rate ÷ 12).
Calculate the Payment, Annual Amort., and EOY.
In the second row (Year #2):
The EOY balance of Year #1 becomes the BOY balance for Year #2.
Insert the new Annual rate of 7%.
Calculate the Monthly Rate (hint: this is the annual rate ÷ 12).
Calculate the Payment, Annual Amort., and EOY.
Answer the assignment questions # 13.
Question #1: The monthly Payment during Year #1 is shown in the first row.
Question #2: The monthly Payment during Year #2 is shown in the second row.
Question #3: Calculate the difference between the 2 monthly payments, and divide it by Year #1 payment to solve for the percentage increase in monthly payment.
Calculate Fixed and Adjustable Rate Mortgages Questions
FOR PROBLEM #4:
Go back to the table you just created.
Erase the data in the 2nd
The EOY balance of the previous year is the BOY balance for the next year.
Insert the same Annual rate of 3%.
Calculate the Monthly Rate (hint: this is the annual rate ÷ 12).
Calculate the Payment, Annual Amort., and EOY.
Continue repeating this for rows #3 and #4.
Note that Row #4, the interest rate changes to 8%.
Answer the assignment question #4.
Question #4: The monthly Payment during Year #4 is shown in the fourth row.
Calculate Fixed and Adjustable Rate Mortgages Questions


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Calculate Fixed and Adjustable Rate Mortgages Questions
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