The Phams are almost two years into the first 5-year term of a 25-year $80,000 mortgage loan at 7.5% compounded semiannually. Interest rates on three-year term mortgage loans are now 6% compounded semiannually. A job transfer necessitates the sale of the Phams’ home. To prepay the closed mortgage, the mortgage contract requires that the Phams pay a penalty equal to the greater of
a. Three months’ interest on the balance.
b. The difference between the fair market value of the mortgage and the balance.
What would be the amount of the penalty if they pay out the balance at the time of the twenty-fourth payment?