1. Suppose that you plan to buy a $810, 000 house. You have saved enough money to make a down payment of 10% and will finance the balance using a 30-year fixed rate loan from your old college roommate who is now a mortgage banker. The current mortgage rate on such loans is 5 ½ % (APR). (a) Compute the monthly payment using the PMT function in Excel and then prepare an amortization table. Fully amortize the loan by going out to the last payment.
(b) Calculate both total $ payments for the stream of payments, the stream of principal payments, and the stream of interest payments. Also calculate the present value of these 3 streams. [To calculate the present value of interest and principal payments, you will need to use the NPV function, rather than the PV function, since the cash flows in the principal and interest columns are not constant throughout time.] What do you observe when you look at these numbers? Explain.
(c) Using your amortization table, what is the principal that remains to be paid after you have completed 15 years of payments? How does this figure relate to the payments that you have already made? How does this figure relate to your remaining payments? Explain.
(d) Suppose that you had bought this house in June of 2006 under the terms described above. Since that date, the average house has declined in value at the rate of 1% per month. [This is the national average for the 3-year period ending summer 2009.] Assuming that you also experienced this price decline on your house, at what point in calendar time will you owe more in principal on the loan than the house is worth? Assume throughout that you make every payment on time and that house prices continue to decline until at least this point in time. Answer the same question if you had paid 30% down instead of 10%. Explain why your answers are different.
(e) Now suppose that your house from part (d) was located in Miami, FL. The average decline in housing prices over...
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