Bernie Madeoff pays $240,000 for a new four bedroom 2400 square foot home outside of Tonopah, Nevada. He plans to make a 20% downpayment, but is having trouble deciding whether he wants a 15-year fixed rate mortgage (6.400%) or a 30-year fixed rate (6.875%).

Assumptions __________________15-Year Mortgage__________30-Year Mortgage

Price of house at purchase..................$240,000 .............................. $240,000

Less down-payment (20%)................ ($48,000) ............................ ($48,000)

Mortgage principal (US$) ................. $192,000 ..............................$192,000

Mortgage length (years) ........................ 15 ........................................30

Mortgage length (months) ..................... 180 ..................................... 360

Fixed rate of interest ..........................6.400% ................................6.875%

a. What is the monthly payment, assuming a fully amortizing loan of equal payments for the life of the mortgage?

b. Assume that instead of making a 20% downpayment, he makes a 10% downpayment, and finances the remainder at 7.125% fixed interest for 15 years. What is his monthly payment?

c. Assume that the home's total value falls by 25%. If the homeowner was able to now sell the house, but at the new home value, what would be his gain or loss on the home and mortgage assuming all of the mortgage principal remains? Use the same assumptions as under part a.