When I retire with my retirement funds, I will purchase a townhouse on the Herengracht canal in Amsterdam, The Netherlands. I will sample the finest lagers in the world, plant tulips and visit the coffee shops. The townhouse will cost US $ 400,000 with a six percent (6%) interest rate. The bank requires twenty (20) percent as a down payment with the balance to be paid off in thirty years (30) years. My mortgage broker suggests some options such as the use of a ?smart loan? which works as follows: Every two weeks a mortgage payment is made that is exactly one-half of the traditional mortgage payment. The APR on the smart loan is exactly the same as the APR of the traditional loan. How long would it take me to pay off the smart loan assuming 30-year traditional mortgage payments? Why is it shorter than the time needed to pay off the traditional mortgage? How much interest would I save? Another option is a bullet loan, in this case a five year bullet. Simply put one would make the monthly payments of the traditional 30 year mortgage for the first five years, but immediately after the 60th. Payment, the bullet payment is due which is the remaining principal of the loan. The final option is an interest only loan, the terms are for the first 10 years, you would only pay the interest payments on the amount borrowed. No principal payments are required. At the end of the 10 year term, you would pay the principal amount. The APR on this loan is 4%.
a. Please construct the amortization table for the 30 year mortgage.
b. How long would it take to pay off the Smart Loan assuming 30 year traditional mortgage payments? Why is it shorter than the time needed to pay off the traditional mortgage? How much would you save?
c. Assume you take out the bullet loan under the terms described. What are the payments on the loan?
d. What are the payments for the interest only loan?
Jan 10, 2018EXPERT
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