Question 3 20 pts LO1 You have a mortgage balance of $110,000 that will require

Question

Question 3 20 pts LO1 You have a mortgage balance of $110,000 that will require you to make 120 more payments of $1,100, starting next month. Alternatively, you can take out a loan today for $110,000 with an interest rate of 3% APR compounded monthly and pay off the original mortgage. The new loan will require you to make 120 more payments, starting next month. If your investments earn 5.00% APR, compounded monthly, how much will you save in PV terms by taking out the new loan to pay off the original mortgage? $3,567 $3,674 $3,463 $3,497

Explanation / Answer

a. Monthly Loan Payment of New Loan = Loan Amount / PVAF (0.25%, 120)

Monthly Loan Payment of New Loan = 110000 / 103.5618

Monthly Loan Payment of New Loan = $1062.17

b. Monthly Savings because of New Loan = Old Loan Monthly Payment - New Loan Monthly payment

Monthly Savings because of New Loan = 1100 - 1062.17

Monthly Savings because of New Loan = $37.83

c. Present Value of Monthly savings

Present Value of Monthly savings = Monthly Savings * PVAF (0.4167%,120)

Present Value of Monthly savings = 37.83 * 94.29

Present Value of Monthly savings = $3567 (option A)

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