You asked the bank for a $250,000 mortgage on 23 February, 2016. They agreed to
ID: 2733561 • Letter: Y
Question
You asked the bank for a $250,000 mortgage on 23 February, 2016. They agreed to give you this mortgage at 8% annual interest payable monthly, but with an origination fee of 0.5% and 1 mortgage discount point. What this means is that you only get 246,250.00 ($250,000 minus 1.5%). Further, suppose that you have to pay the mortgage back in 3 years and your first payment is due after one month form 23 February, 2016.
A) What is the monthly payment?
B) What is the effective cost of mortgage?
C) If you pay the mortgage according to the loan agreement, how much total interest will you pay ignoring origination fee and mortgage discount point and assume that the loan amount is $250,000?
D) You can deduct the total interest paid for tax purposes. What will be the interest tax deduction for 2017?
Explanation / Answer
A. P = L[c(1 + c)n]/[(1 + c)n - 1]
where,
P = Monthly payment
L = Loan amount = $246250
Monthly interest rate = 0.08/12 = 0.00666%
No. of per month instalments = 3 x 12 = 36 months
Monthly payment = $7716.58
B. Effective cost of mortgage = 7716.58 x 36 = $277796.88
C. Monthly instalment in this case will be $7834.09
Total amount paid = $7834.09 x 36 months = $282027.29
Total interest paid = 282027.29 - 250000 = $32027.29
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