1. You wish to buy a house. To do so, you borrow $150,000. The property taxes on
ID: 1171829 • Letter: 1
Question
1. You wish to buy a house. To do so, you borrow $150,000. The property taxes on
the home you are buying are currently $5400/year (divided into monthly payments of
$450). In addition to your home purchase, you would like to save for retirement. You
can budget $1800/month (total) to both your living and retirement expenses. You
wish to determine which loan is best: a 15 or 30 year fixed rate mortgage. The interest
rates are 3.45% and 4.05%, respectively (both are nominal and compounded monthly).
Compare the accumulated values in your retirement account at time
t
= 30 under the
following three assumptions (all nominal compounded monthly):
(a) The retirement account pays 4.5% interest.
(b) The retirement account pays 7.5% interest.
2. At what nominal rate will both loan options be indistinguishable?
Explanation / Answer
Answer A)
Answer B)
In the current situation the loan of option A , giving higher return for retirement fund at the end of 30 years .
so , the making both loan options be indistinguishable, eitherv the rate of optiuon A should increase or the rate of option b should decrease.
at rate of 3.71 % for option A ,and the current rate (4.05% ) for option B , the total accumulated retirement fund is same at the growth rate of 4.5% .
at rate of 3.905 % for option B ,and the current rate (3.45% ) for option A , the total accumulated retirement fund is same at the growth rate of 4.5% .
the same can be checked by putting the value in above spreadsheet of answer A.
Loan Principle Amount 150,000.00 Annual Interest Rate 3.45% Loan Period (in months) 180.00 Original Repayment Amount 1,068.64Related Questions
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