In our brief case study, we assume the Thomas and Jefferson families have identical mortgages (30-year term, fixed-rate
Posted: Mon Jul 11, 2022 12:15 pm
In our brief case study, we assume the Thomas and Jeffersonfamilies have identical mortgages(30-year term, fixed-rate 6% APR, and a loan amount of $175,000).The Thomas family will notpay extra but the Jeffersons will. Follow the steps below prior toyour analysis.1. Using the Payment mini calculator of the Financial Toolboxesspreadsheet, calculate themortgage payment (the same for both families).2. Assume that the Thomas’s will make only the required mortgagepayment. TheJeffersons, however, would like to pay off their loan early. Theydecide to make theequivalent of an extra payment each year by adding an extra 1/12 ofthe payment to therequired amount.Calculate the following to find what they plan to pay eachmonth:a. 1/12 of the required monthly paymentb. Jeffersons monthly payment found by adding this 1/12 to therequired payments3. The Thomas’s will take the full 30 years to pay off their loan,since they are making onlythe required payments. The Jefferson’s extra payment amount, on theother hand, willallow them to pay off their loan more rapidly. Use the Years minifinancial calculator ofthe Financial Toolbox spreadsheet to calculate the approximatenumber of years (nearest10th) it would take the Jeffersons to pay off their loan.
Thomas Family
Jefferson Family
1/12th of Monthly Payment 87.43 Monthly Payment + Extra1/12th $1136.64
Rates Annuity Amount in 360 Months Rates Annuity Amountin 66 Months
0%
$31474.80
0%
$75018.24
1%
($36,688.09)
1%
($77,086.58)
2%
($43,078.98)
2%
($79,230.08)
3%
($50,948.69)
3%
($81,451.76)
4%
($60,680.74)
4%
($83,754.77)
5%
($72,764.37)
5%
($86,142.41)
6%
($87,824.75)
6%
($88,618.11)
7%
($106,662.06)
7%
($91,185.43)
8%
($130,302.13)
8%
($93,848.10)
questions
What assumptions may not necessarily be valid for atypical family regarding both the loan rate and savings planrate?
Discuss some basic pros and cons to these two verydifferent approaches the Thomas and Jefferson families made withtheir extra monthly payment. Consider various ideas such aspossible changes in the family’s employment situation, marketperformance, tax deductions, etc
Comment on the merits of the advice you read from thetwo financial columnists.
4.If you were to pay extra principal on a mortgage, whenis the best time to do it (early or later in the loan process) andwhy?
When you pay extra principal on a loan, describe whetheryou feel you are actually earning interest on that money or not.That is, how does the old adage “a penny saved is a penny earned”apply in this context?
Thomas Family
Jefferson Family
1/12th of Monthly Payment 87.43 Monthly Payment + Extra1/12th $1136.64
Rates Annuity Amount in 360 Months Rates Annuity Amountin 66 Months
0%
$31474.80
0%
$75018.24
1%
($36,688.09)
1%
($77,086.58)
2%
($43,078.98)
2%
($79,230.08)
3%
($50,948.69)
3%
($81,451.76)
4%
($60,680.74)
4%
($83,754.77)
5%
($72,764.37)
5%
($86,142.41)
6%
($87,824.75)
6%
($88,618.11)
7%
($106,662.06)
7%
($91,185.43)
8%
($130,302.13)
8%
($93,848.10)
questions
What assumptions may not necessarily be valid for atypical family regarding both the loan rate and savings planrate?
Discuss some basic pros and cons to these two verydifferent approaches the Thomas and Jefferson families made withtheir extra monthly payment. Consider various ideas such aspossible changes in the family’s employment situation, marketperformance, tax deductions, etc
Comment on the merits of the advice you read from thetwo financial columnists.
4.If you were to pay extra principal on a mortgage, whenis the best time to do it (early or later in the loan process) andwhy?
When you pay extra principal on a loan, describe whetheryou feel you are actually earning interest on that money or not.That is, how does the old adage “a penny saved is a penny earned”apply in this context?