1. What is amortization? Describe other types of loan arrangements. If you could
ID: 1171967 • Letter: 1
Question
1. What is amortization? Describe other types of loan arrangements. If you could afford to pay cash for a home, is it worth it to take a mortgage out anyway? If no, why not. If yes, why. Here are the variables: 30 year amortized mortgage at 5% fixed Investment opportunity at 3.5% fixed Price of the home is $500,000. You’ll either invest $400,000 and make a down payment on the house of $100,000 and mortgage the rest. Hint: Find out if the interest earned on the investment is more or less than the interest paid on the mortgage. Show your work. I am not grading you on whether you get it right, more that you do the time value of money calculations.
Explanation / Answer
Amortization refers to cost of loan to be paid over a period of time
Future value of investment of 400000 after 30 years
FV = pv*(1+r)^n PV = 400000 r= 3.5% n = 30
400000*(1.035)^30
1122717.482
Monthly payment toward mortgage
Using PMT function in MS excel
PMT(5%,30,400000,0)
($26,020.57)
total payment made towards mortgage
Yearly payment*no of years
26020.57*30
($780,617.22)
total interest payment on mortgage
780617.22-400000
380617.22
total interest earned on fixed investment
1122717.48-400000
722717.48
Difference in interest earned over interest paid
722717.48-380617.22
342100.26
It is better to avail the mortgage and rest amount should be deposited
Amortization refers to cost of loan to be paid over a period of time
Future value of investment of 400000 after 30 years
FV = pv*(1+r)^n PV = 400000 r= 3.5% n = 30
400000*(1.035)^30
1122717.482
Monthly payment toward mortgage
Using PMT function in MS excel
PMT(5%,30,400000,0)
($26,020.57)
total payment made towards mortgage
Yearly payment*no of years
26020.57*30
($780,617.22)
total interest payment on mortgage
780617.22-400000
380617.22
total interest earned on fixed investment
1122717.48-400000
722717.48
Difference in interest earned over interest paid
722717.48-380617.22
342100.26
It is better to avail the mortgage and rest amount should be deposited
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