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CHAPTER 2 SERIES AND FINANCIAL APPLICATIONS

The Scenario

Imagine that you and your spouse have been saving for several years for a down payment on a house. You both agree that the conditions in the marketplace are favourable to purchase your first home.

You both have full time jobs, and have a combined gross income of $70 000. You have been depositing $500 each month into a savings account that pays 6%, compounded monthly, for the last 6 years. Keep in mind that most financial institutions will only approve a mortgage if the combined monthly payment for the mortgage, property tax, heating costs and any other outstanding debt does not exceed 32% of your gross income. Estimate that your monthly heating costs would be $90, and that your annual property taxes would be roughly $3200. You also have outstanding debt of another $500 per month (car loan payment and minimum monthly payments on all credit cards).

Select your mortgage

You have decided that you would like to obtain a 5-year closed mortgage financed over 25 years.

1. Select the financial institution in your area that offers the best current mortgage rate.
2. Determine the maximum amount of the mortgage you qualify for using the information provided above and the online mortgage qualifying calculator.
3. Using the newspaper, real estate news or the multiple listing service on the Internet, select the home that you would like to purchase.

Create Amortization Tables

1. Determine the amount you have accumulated towards the down-payment of your home.
2. Determine the maximum purchase price that you can qualify for a mortgage.
3. Using your down payment, the purchase price, and the mortgage rate you selected, calculate the size of your monthly payment. Create an amortization table for your mortgage using a spreadsheet. For a sample amortization table, see page 131 in your textbook. Keep a file copy of each table you create.
4. Adjust the amortization table to reflect bi-weekly payments. What impact does this have on the mortgage?
5. Adjust the amortization table to reflect weekly payments. What impact does this have on the mortgage?
   

Your Job

Create a report that includes the following items:

• a picture of the home you selected to buy, along with a description and the purchase price
• a paragraph that explains the reasons for choosing this home.
• a printout of the maximum mortgage amount you qualify for.
• the calculations used to determine the monthly payment.
• the formulas used in the creation of the spreadsheets.
• a printout of the amortization tables under each of the following conditions.
  - monthly payments
  - biweekly payments
  - weekly payments
• a paragraph that discusses and compares the length of time required to pay off the mortgage as well as the interest paid over the life of the mortgage under the three different payment options.

Your report must be at least 500 words (approximately two double-spaced pages). You will be assessed on how well the report addresses the criteria mentioned above.