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HomeTextbook Notes300,000CA170,000

FINE 445 Chapter Notes - Chapter 4: Effective Interest Rate, Annual Percentage Rate, Nominal Interest Rate

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erinmacaw341
19 Feb 2017
School
McGill University
Department
Finance
Course
FINE 445
Professor
Mo Chaudhury

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Document Summary

Cam - constant amortization mortgage - payments on constant amortization mortgages are determined first by computing a constant amount of each monthly payment to be applied to principal. Interest is then computed on the monthly loan balance and added to the monthly amount of amortization to determine the total monthly payment. Cpm - constant payment mortgage - this payment pattern simply means that a level, or constant, monthly payment is calculated on an original loan amount at a fixed rate of interest for a given term. Cam - lenders recognized that in a growing economy, borrowers could partially repay the loan over time, as opposed to reducing the loan balance in fixed monthly amounts. Cpm - at the end of the term of the mortgage loan, the original loan amount or principal is completely repaid and the lender has earned a fixed rate of interest on the monthly loan balance. However the amount of amortization varies each month.

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Related Questions

Jane plans to borrow from a bank to finance her investment in a real estate project. She considers an ARM loan with three-year loan term, $100,000 loan amount. The loan has the following terms: 1) initial interest rate = 8.5%; 2) margin = 3%; 3) loan amortization period = 15 years; 4) frequency of adjustment = 1 year (monthly compounding); 5) interest rate cap = none; 6) payment cap = none; and 7) discount points = 3%; 8) no negative amortization is allowed. The index rates (i.e., based on 3 year treasure rate) for next two years (i.e., the 2nd and 3rd year) are expected to be 11% and 8%, respectively.

(a) If the loan will be repaid after 3 years, what would be the monthly payment and the ending loan balance for each of the three years?

(b) What is the effective mortgage yield for borrowing this mortgage?

(c) Now suppose that there is an annual interest rate cap of 2% specified in the loan contract. What is the effective mortgage yield for borrowing this mortgage, assuming that no negative amortization is allowed?

(d) Now suppose, instead of the annual interest rate cap of 2%, the bank prefers a 3% annual payment cap. Assume that negative amortization is allowed, what is the effective mortgage yield for borrowing this mortgage?

The beginning of this question is also located in the 7 edition of personal finace book by authur in chapter 8cc -22Q

Last week, the local newspaper mortgage rate column reported that the rate for a 30- year fixed rate mortgage was 3.88 percent, while for a 7 year balloon payment mortgage was 3.45 percent ( payments were calculated on the basis of 30 - year amortization). A 1 year ARM was available for 3.25 percent ( payments were also calculated on the basis of 30 year amortization). Assumming a loan amount of 120,000 , calculate the payment of each mortgage. Aside from the significant differences in the mortgage payment amounts, what other factors should the dumonts consider when choosing their mortgage? What are the advantages and disadvantages of an interst- only mortgage?

1.A variable rate mortgage means:

a.The interest rate is not fixed b.The interest rate is fixed for five years c.The rate is not subject to change d.Larger monthly payments than a fixed rate e.None of these

2.An amortization schedule shows:

a.Balance of interest outstanding b.The increase to principal c.Increase in loan outstanding

d.Portion of payment broken down to interest and principal e.None of these

3.Beverly Frost bought a home for $190,000 with a down payment of $19,000 at 7% for 25 years. Since then the rate has risen to 9%. How much more would her monthly payment be if she bought the house at 9%?

a.$208.97 b.$436.40 c.$143.00 d.$227.43 e.None of these

4.Daniel and Jan agreed to pay $560,000 for a four-bedroom colonial home in Waltham, Massachusetts, with a $60,000 down payment. They have a 30-year mortgage at a fixed rate of 6.00%.

How much is their monthly payment?

After the first payment, what would be the balance of the principal?

5.Rick Rueta purchased a $90,000 home at 9% for 30 years with a down payment of $20,000. His annual real estate tax is $1,800 along with an annual insurance premium of $960. Rick’s bank requires that his monthly payment include an escrow deposit for the tax and insurance. What is the total payment each month for Rick?