# A+ answers | Algebra homework help

List the Pros and Cons in the table below for each of the two different investment strategies taken by the Thomas and Jefferson families. It is beneficial to point out the advantages of refinance opportunities that offer lower APRs, rather than merely paying extra amounts on an original mortgage over the term of the loan.

Procedure:

In our brief case study, we assume the Thomas and Jefferson families have identical mortgages (30-year term, fixed-rate 6% APR, and a loan amount of $175,000). The Thomas family will not pay extra but the Jefferson will. Follow the steps below prior to your analysis.

1. Using the Payment mini calculator of the Financial Toolboxes spreadsheet, calculate the mortgage payment (the same for both families).

2. Assume that the Thomas will make only the required mortgage payment. The Jeffersons, however, would like to pay off their loan early. They decide to make the equivalent of an extra payment each year by adding an extra 1/12 of the payment to the required amount. Complete the following calculations to find what they plan to pay each month:

(a) 1/12 of the required monthly payment

(b) By adding this 1/12 to the required payments, the Jefferson’s plan to pay:

3. The Thomas will take the full 30 years to pay off their loan, since they are making only the required payments. The Jefferson’s extra payment amount, on the other hand, will allow them to pay off their loan more rapidly. Use the Years mini financial calculator of the Financial Toolbox spreadsheet to calculate the approximate number of years (nearest 10^{th}) it would take the Jefferson’s to pay off their loan.

For the Thomas Family: Assume that they could afford to make the same extra payments as the Jeffersons, but instead they decide to put that money (#2a. from Procedures above) into a savings plan called an annuity. Use the Future Value mini financial calculator of the Financial Toolbox spreadsheet to calculate how much they will have in their savings plan at the end of 30 years at the various interest rates. Write your answers (to the nearest dollar) in the appropriate cells of the table below.

For the Jefferson Family : Assume that they save nothing until their loan is paid off, but then after their debt is paid, they start putting their monthly payment and 1/12 (#2b. from Procedures above) into a saving plan. The time in months they invest is equal to 360 months minus the number of months needed to pay off the loan (#3 from Procedures above) multiplied by 12. Use the Future Value mini financial calculator to calculate how much they will have in their savings plan at the various interest rates. Write your answers (to the nearest dollar) in the appropriate cells of the table below.

1. What generalizations can you make from the annuity amounts reflected in the analysis table above with regards to the different strategies taken by the families? That is, from a purely financial aspect of the calculations in your table what generalizations could you make regarding the two different strategies?

2. What assumptions may not necessarily be valid for a typical family regarding both the loan rate and savings plan rate?

3. Discuss some basic pros and cons to these two very different approaches the Thomas and Jefferson families made with their extra monthly payment. Consider various ideas such as possible changes in the family’s employment situation, market performance, tax deductions, etc.

4. Comment on the merits of the advice you read from the two financial columnists.

5. Note the dates of the advice columns. How might market performance figure in to their advice they gave at that time?

6. Why do you think Sharon Epperson’s advice at the end specifically calls attention to an assumption of whether you are “debt-free and maxing out your 401(k) and IRAs?”

7. If you were to pay extra principal on a mortgage, when is the best time to do it (early or later in the loan process) and why?

8. When you pay extra principal on a loan, describe whether you feel you are actually earning interest on that money or not. That is, how does the old adage “a penny saved is a penny earned” apply in this context?

9. Rework your calculations using a different starting interest rate for the mortgage and/or a different extra payment amount. Do these changes affect any of the generalizations you have made above? Explain.

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