1. effects of changing conditions
Mortgages – Day II
effects of changing conditions

2. Mortgage Details Some more mortgage definitions:
Open Mortgage – extra payments can be made to reduce the outstanding principal
Closed Mortgage – no extra payments can be made
Variable Rate Mortgage – the interest rate fluctuates with the market values (can be locked in at any time)
Fixed Rate Mortgage – the interest rate is constant throughout the term of the mortgage.

3. Calculating Total Interest
CASE STUDY : A bank offers a mortgage rate of 6.5%/a amortized over 25 years. If the mortgage is for $280000, what would the monthly payments be?
Their payments would be $
300
6.5
280000
The total interest paid would be:
=300* =$282653 12 2

4. Calculating Total Interest
CASE STUDY : A bank offers a mortgage rate of 2.5%/a amortized over 25 years. If the mortgage is for $280000, what would the monthly payments be?
Their payments would be $
300
2.5
280000
The total interest paid would be:
=300* =$96 293 12 2

5. Effects of Changing Conditions
Using the previous case study, we will examine the effects of the following options.
In each situation calculate the new payment per period and the total interest paid.
Changing Amortization Period
Change the amortization period from 25 to 20 years.
Changing Payment Frequency
Change the payment frequency from monthly to weekly (still use a 25 year amortization period)
Changing Payment Amount
Change the payment amount to $2000 or $1300 per month and recalculate the number (N) of payments required. Calculate total interest paid.
Effect of Lump Sum Payments
After 5 years (60 payments), make a lump sum deposit of $25000, recalculate the number of payments remaining, assuming you still pay $ per month.

6. Changing Conditions : Case 1
Changing Amortization Period
Change the amortization period from 25 to 20 years.
Their payments would be $
240
2.5
280000
The total interest paid would be:
=240* =$ 12 2

7. Changing Conditions : Case 2
Changing Payment Frequency
Change the payment frequency from monthly to weekly (still use a 25 year amortization period)
Their payments would be $289.22
(per week)
52*25=1300
2.5
280000
The total interest paid would be:
=1300* =$95 986 52 2

8. Changing Conditions : Case 3
Changing Payment Amount
Change the payment amount to $1300 per month and recalculate the number (N) of payments required. Calculate total interest paid.
The number of $1300 payments would be 285.6 ?
285.6
2.5
280000
-1300
The total interest paid would be:
=285.6* =$91 280 12 2

9. Changing Conditions : Case 3
Changing Payment Amount
Change the payment amount to $2000 per month and recalculate the number (N) of payments required. Calculate total interest paid.
The number of $2000 payments would be ?
123.05
2.5
280000
-2000
The total interest paid would be:
=123.05* =$33 900 12 2

10. Changing Conditions : Case 4
Effect of Lump Sum Payments
After 5 years (60 payments), make a lump sum deposit of $25000, recalculate the number of payments remaining, assuming you still pay $ per month.
After 5 years the remaining balance would be: $
5*12=60
2.5
280000
After a lump sum payment the new balance would be:
$ $25000 = $ ? 12 2

11. Changing Conditions : Case 4 (cont’d)
Effect of Lump Sum Payments…
Now calculate the number of payments required to pay off the balance assuming the same payment of $
The total number of payments remaining is : ?
208.27
2.5
The total interest paid is
( )* = $ 12 2

12. Summary : Changing Conditions
Scenario
Payment Amount
# Payments
# Years
Total Interest Paid
High Rate(6.5%) $
300 25 $
Original (2.5%) $
$96 293
20 yr. amortization $
240 20 $
Weekly payments
$289.22
1300
$95 986
Monthly payments of $1300
$1300
285.6
23.8
$91 280
Monthly payments of $2000
$2000
123.05
10.25
$33 900
Lump sum payment $25000
268.27
22.36 $