1. Suppose you take a $220,000 thirty-year fixed-rate mortgage at 5%, two discount points, monthly payments. At the end of the first year you inherit $16,000 from your now-favorite aunt. You decide to apply this $16,000 to the principal balance of your loan.
A. How many monthly payments are remaining after the extra lump sum payment is made?
B. What is your net interest savings over the life of the loan, assuming the loan is held to its maturity?
2. You just took a fixed-rate mortgage for $240,000 at 4.75% for 30 years, monthly payments, two discount points. Before you make any payments you receive a nice raise so you plan to pay an extra $200 per month on top of your normal payment.
A. What is your net interest savings over the life of the loan, assuming the loan is held to its maturity?
B. If you make this higher payment and hold the loan for its full life, what is the effective cost of the loan?