Asked by Brian Dykstra on May 20, 2024
Verified
The Robinson family is considering purchasing a house in the Ottawa area for $650,000. They wish to amortize the loan over 25 years, and pay for the mortgage through monthly payments over 3 years at a current interest rate of 5.8% compounded monthly. They family is calculating the change in interest rates if at the end of the third year interest rates change from 5.8% to 6.1% compounded monthly. Determine the value of the current payment and the new payment after year 3.
A) Current payment = $4,113.55; new payment = $4,367.36
B) Current payment = $4,108.85; new payment = $4,217.13
C) Current payment = $4,202.15; new payment = $4,423.27
D) Current payment = $4,333.45; new payment = $4,673.23
E) Current payment = $4,123,67; new payment = $4,523.87
Compounded Monthly
Interest or returns on an investment are calculated and added to the principal amount every month.
Amortized
Refers to the process of paying off debt over time in equal installments of principal and interest.
- Comprehend and determine the effects of refinancing a mortgage or loan with a reduced interest rate.
Verified Answer
LH
Luseane HalaevaluMay 23, 2024
Final Answer :
B
Explanation :
The correct answer is determined by calculating the monthly mortgage payments using the formula for a fixed-rate mortgage. Initially, the payment is calculated based on a $650,000 loan, a 25-year amortization period, and a 5.8% annual interest rate compounded monthly. After 3 years, the remaining balance is recalculated, and the new payment is determined based on the remaining balance, the remaining term (22 years), and the new interest rate of 6.1%. The option that accurately reflects these calculations is the correct one.
Learning Objectives
- Comprehend and determine the effects of refinancing a mortgage or loan with a reduced interest rate.