What is a Mortgage? - Part 2 Review 1. What is the term of a mortgage? The length of time that the interest rate is fixed. 2. What is the difference between the amortization period and the term of a mortgage? Amortization period is the length of time in which the mortgage is paid off. 3. Why would someone choose a longer amortization period? They would choose a longer amortization period for their mortgage so that their payments would be lower.

Example 1: A mortgage of $ is required to purchase a house. The mortgage is to be repaid with equal monthly payments over 25 years at 8.4% compounded monthly. What is the monthly payment? PV = i = n =

Example 2: The mortgage in Example 1 had an initial term of 5 years. So at the end of 5 years it had to be renewed. By that time, the interest rates had dropped to 6.6%, so it was renewed for another 5 year term compounded monthly. a. How many years are remaining until the mortgage is amortized? 20 years b. How many payments are left after the first 5 year term is up? Initial number of payments = 12 x 25 = 300 Number of payments already made =12x5 = 60 Payments left = = 240 c. Calculate the outstanding principal (PV) when the mortgage is renewed. PV = ?? R = i = 0.08 = n = 240 d. What is the new monthly payment? (Use the new rate and the new PV) R = ?? PV = i = = n = 240

Homework Pg. 290 (The same sheet from last day) # 6, 7, 9, 10