10 years ago you purchased some land from a neighbor for $400,000. The former ow
ID: 2642124 • Letter: 1
Question
10 years ago you purchased some land from a neighbor for $400,000. The former owner agreed to give you a 20 year mortgage at 4% on the entire amount. The mortgage payments are to be calculated using the constant period payment method. The former owner passed away recently and the next of kin are asking you to pay the outstanding balance immediately. You are not legally obliged to pay the outstanding balance, but you are legally obliged to make 10 more years of annual payments.
How much would you be willing to pay now (after 10 years of payments on the loan) to the next of kin if you could get a bank mortgage for the outstanding balance to be repaid over 10 years at 5% per year using the constant period payment method. Should the next of kin take your offer? Why or why not?
Explanation / Answer
Year
Interest
Principal
Balance
1
$15,757.38
$13,329.67
$386,670.33
2
$15,214.31
$13,872.74
$372,797.59
3
$14,649.12
$14,437.94
$358,359.65
4
$14,060.89
$15,026.16
$343,333.48
5
$13,448.70
$15,638.35
$327,695.13
6
$12,811.57
$16,275.48
$311,419.65
7
$12,148.48
$16,938.57
$294,481.08
8
$11,458.38
$17,628.67
$276,852.40
9
$10,740.16
$18,346.89
$258,505.51
10
$9,992.68
$19,094.38
$239,411.13
After 10 year amount outstand 239411.13 paid to kin but actually paid 200000 repaid in 10 years at 5% per year using interest
Year
Interest
Principal
Balance
1
$9,640.84
$15,814.88
$184,185.12
2
$8,831.72
$16,624.00
$167,561.11
3
$7,981.21
$17,474.52
$150,086.60
4
$7,087.18
$18,368.55
$131,718.05
5
$6,147.41
$19,308.32
$112,409.73
6
$5,159.56
$20,296.17
$92,113.56
7
$4,121.17
$21,334.56
$70,779.01
8
$3,029.65
$22,426.07
$48,352.93
9
$1,882.29
$23,573.43
$24,779.50
10
$676.23
$24,779.50
$0.00
Should not accept because ther is loss of 39411.13 as compare to 1% hike in interest rate(4% to 5%)
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