Mortgage Lab Signature Assignment
Mortgage Lab Signature Assignment
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Introduction: In this lab you will examine a home loan, also known as a mortgage.
In Part I you will be computing various values associated with a 30 year loan.
In Part II you will calculate values associated with selling the house after 10 years.
In Part III you will be computing values associated with a 15 year loan and compare them to
the 30 year loan values.
In Part IV you will examine the e ects of making extra monthly payments on the 30 year loan.
In Part V you will do a "Re ective Writing" that will accompany the lab and be submitted with
the lab on your e-Portfolio.
Warning! You can submit answers to make sure they are correct before proceeding to the
next. It is a good idea to also keep a written account of the given values (e.g. original price of
the house, annual interest rate, etc.) as you will be asked to refer back to these values as you
go. Once you have "submitted" an answer to a question, you can click back and forth between
the parts if you need to, though you may need to click on "Reattempt this question" at the top
of the page. Don't worry, your correct answers will be saved!
Round all of your answers to the nearest cent when appropriate to do so. Some questions are
programmed to allow for slight variations in the answers due to rounding errors, BUT it is
important that you don't round values you are using in formulas. Only round your nal
answers.
Part I
Assume that you have found a home for sale and have agreed to a purchase price of $265100.
Down Payment: Assume that you are going to make a 10 % down payment on the house.
Determine the amount of your down payment and the balance to nance.
Now use the loan formula to nd the monthly payment, d. The loan formula solved for d is:
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r
P0 ( )
k
d =
− Nk
r
(1 − (1 + ) )
k
What minimum monthly take-home pay (i.e. your monthly pay checks after taxes) should you
earn in order to meet this goal? In other words, 35% of what monthly take-home pay is equal to
your mortgage payment?
profession or by your future college degree and compare it with your last answer. Make a note
of it as you will need to comment on it in the Re ective Writing for this lab.
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Warning!You can submit answers to make sure they are correct before proceeding to the next.
It is a good idea to also keep a written account of the given values (e.g. original price of the
house, annual interest rate, etc.) as you will be asked to refer back to these values as you go.
Once you have "submitted" an answer to a question, you can click back and forth between the
parts if you need to, though you may need to click on "Reattempt this question" at the top of
the page. Don't worry, your correct answers will be saved!
Round all of your answers to the nearest cent when appropriate to do so. Some questions are
programmed to allow for slight variations in the answers due to rounding errors, BUT it is
important that you don't round values you are using in formulas. Only round your nal
answers.
Suppose that after living in the house for 10 years, you decide to sell it. The economy
experiences ups and downs, but in general the value of real estate increases over time.
Recall the original purchase price (you can click back to Question 1 if you need to).
r Nk
PN = P0 (1 + )
k
This is just an approximation, so we'll use an annual compounding period (so, k = 1).
Find the future value of the home 10 years after you purchased it assuming a 4 % interest
rate. Use the full purchase price of the home from the previous problem (Question 1) as the
principal (or initial value, P0 ) in the compound interest formula.
To nd the principal balance on the mortgage, you will use the Loan Formula:
− Nk
r
d(1 − (1 + ) )
k
P0 =
r
( )
k
(See p.214 of your text in the Finance module for help. In this formula, d is the monthly
payment and r is the annual interest rate expressed as a decimal from Part I, so r = ; N is
the number of years remaining on the loan, and, of course, k = 12.)
Expenses = $ 370083.62
After 10 years, did you lose or gain money from selling the house? Answer: gained
How much (did you lose or gain)? Answer:$ 22329.14
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Warning!You can submit answers to make sure they are correct make before proceeding to
the next. It is a good idea to also keep a written account of the given values (e.g. original price
of the house, annual interest rate, etc.) as you will be asked to refer back to these values as you
go. Once you have "submitted" an answer to a question, you can click back and forth between
the parts if you need to, though you may need to click on "Reattempt this question" at the top
of the page. Don't worry, your correct answers will be saved!
Round all of your answers to the nearest cent when appropriate to do so. Some questions are
programmed to allow for slight variations in the answers due to rounding errors, BUT it is
important that you don't round values you are using in formulas. Only round your nal
answers.
In this part of the lab you will examine the values associated with a 15 year mortgage. You will
use the same purchase price, down payment, and loan amount from Question 1.
As you did for the 30 year mortgage in Question 1, compute the monthly payment for the 15
year loan.
Again, use the loan formula to nd the monthly payment, d. The loan formula solved for d is:
r
P0 ( )
k
d =
− Nk
r
(1 − (1 + ) )
k
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amount repaid?
Compare the total interest paid with this 15 year mortgage to the total interest paid with the 30
year mortgage (from Question 1).
How much would you save in interest if you use the 15 year mortgage?
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Warning!You can submit answers to make sure they are correct make before proceeding to
the next. It is a good idea to also keep a written account of the given values (e.g. original price
of the house, annual interest rate, etc.) as you will be asked to refer back to these values as you
go. Once you have "submitted" an answer to a question, you can click back and forth between
the parts if you need to, though you may need to click on "Reattempt this question" at the top
of the page. Don't worry, your correct answers will be saved!
Round all of your answers to the nearest cent when appropriate to do so. Some questions are
programmed to allow for slight variations in the answers due to rounding errors, BUT it is
important that you don't round values you are using in formulas. Only round your nal
answers.
While using a 15 year mortgage saves you money on interest compared to the 30 year
mortgage, the monthly payment for the 15 year loan is higher than the 30 year. A good
alternative is to use a 30 year loan, but to make extra payments toward the principal. This
approach gives the homeowner some exibility (you can always pay the minimum monthly
payment if you can't pay the extra principal) but results in saving money on interest and paying
the loan o quicker.
To see the e ect of making extra principal payments, you'll need some information from
Question 1.
Recall from Question 1, the original loan amount was $238590 and the 30 year interest rate
expressed as a decimal was r = 0.0482 .
Recall that 30 year monthly payment from Question 1. It should have been approximately:
Using this value, suppose that you pay an additional $100 a month toward principle. You will
need to gure out how long it will take to pay o the loan with this additional payment. In order
to do this, you would have to solve the following loan formula for N , which represents years:
− 12N
* r
d (1 − (1 + ) )
12
P0 =
r
( )
12
(Note: P0 is the original loan amount from Question 1 and here we have used k = 12 and d * is
your monthly payment plus the additional $100.)
In order to solve the above equation for N you would use logarithms. Using the notation log
for the common logarithm, you would get the following formula:
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*
12d
log( )
*
( 12d − P0 r )
N =
r
(12 log(1 + ))
12
Use the above formula to gure out N , the number of years it will take to pay o the loan with
the additional $100 payment. Alternatively, use an online amortization calculator such as:
http://bretwhissel.net/amortization/amortize.html. You will need to enter the principal, the
annual interest rate from this question, and the payment amount (your d ). Leave the "number
*
of regular payments" blank and hit "Calculate". The number of regular payments divided by 12
should agree with N from the formula above. Find N accurate to two decimal places- don't
round any more than that! Give it a try!
N = 25.55
To nd the total interest paid you need the number of payments you made (which you either
have or can get from N by multiplying it by 12). You can round the number of payments to the
nearest whole number.
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This needs to be a separate page that is typed, proof-read for typos, spelling, and grammar.
Your writing should be in an essay form (written in paragraphs). Use 12-point font and double
space. Add a title (e.g. Re ective Writing for Mortgage Project). Your instructor will provide
details for turning it in.
Provide a brief introduction explaining the lab in your own words. Also in the introduction, tell
the audience which mathematical techniques you used in the lab (e.g. percentages, loan
formulas, etc.). Then, please respond to each of the questions (in essay form, so restate the
question you are answering).
Do you think this project shows how math can be applied to the real world? If "yes",
please elaborate on why are the results important or bene cial. If "no", how could the lab
change to make it more applicable to the "real world"?
Can you give an example of another application where this type of analysis would be
bene cial? Be speci c.
If you were a mortgage broker, why would it be important to be able to explain the
details of this project to clients?
Compare the di erences between the 30 year, 15 year, and 30 year with extra payment
plans. What are the "pros and cons" of each?
Did this assignment change your opinion of the usefulness of math? Write one paragraph
stating what ideas changed and why. If this project did not change the way you think,
write how this project gave further evidence to support your existing opinion about
applying math. Be speci c.
In Part I, you were asked to "do a search on the internet for the "average salary" of either your
future profession or by your future college degree and compare it with" the minimum annual gross
salary you'd need in order to a ord the house. Comment on what you found out. Does it
change your views on either purchasing a home or your choice of major?
ePortfolio: Post a copy of this lab, including the Re ective Writing, to your ePortfolio (you can
print a digital version as a pdf, or if you need to, scan a copy in the Copy Center). For more
information about ePortfolios, please see the syllabus.
True
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