A couple is considering buying a house with a mortgage loan of $500,000 and a term of 25 years. The mortgage interest is currently 2.75%. The mortgage is paid back using a constant annual amount for interest and repayment. All interest rates in this question are annual with semi-annual compounding
4.) For an annual interest rate of 2.75%, what mortgage loan can be obtained with constant bi-weekly payments of $1,000 over 25 years? Why it is more or less than $500,000?
5. For an annual interest rate of 2.75%, what mortgage loan can be obtained with constant annual payments of $26,000 over 25 years? Why your answers are different in 4) and 5) even though you make the same annual payment of $26,000?
6. For what interest rate has a loan of $500,000 a bi-weekly payment of $1,000over 25 years? Is it more or less than original 2.75%? Comment!
7. Assume now that the interest rate varies every five years, and that in the four five-year periods it is 2.75%, 3.00%, 2.25%, 2.50% and 2.75%. Payments in the first years are made as if the interest rate will be 2.75% during the25 years, in the second five years as if the interest rate will be 3.00% in the remaining 20 years, and so on. Make up the resulting annual mortgage repayment scheme