Answers to A Case Study of Paying Extra Principal on a Mortgage, Quizzes of Accounting

Download Answers to A Case Study of Paying Extra Principal on a Mortgage and more Quizzes Accounting in PDF only on Docsity! Name: A Case Study of Paying Extra Principal on a Mortgage Place your answers from the procedure and analysis here: 1. Required Monthly Payment = $1,049.12 2. a. 1/12 of the required monthly payment = $87.43 b. By adding this 1/12 to the required payments, the Jeffersons plan to pay $1,136.64 each month. 3. Number of years to pay off loan = 24.5 years Thomas Family Jefferson Family 1/12th of Monthly Payment $1,049.12 Monthly Payment + Extra 1/12th $1,136.64 Rates Annuity Amount in 360 Months Rates Annuity Amount in 360 Months 0% $31,474.80 0% $14,425.95 1% $36,688.09 1% $16,805.81 2% $43,078.98 2% $19,718.76 3% $50,948.69 3% $23,299.43 4% $60,680.74 4% $27,718.62 5% $72,764.37 5% $33,193.33 6% $87,824.75 6% $39,999.68 7% $106,662.06 7% $48,489.54 8% $130,302.13 8% $59,111.86 Answer the following reflection questions: 1. What assumptions may not necessarily be valid for a typical family regarding both the loan rate and savings plan rate? It will not be necessarily valid to assume that any specific savings plan could have a higher return compared to another as every type of savings plan is exposed to fluctuations in the market. Thus, it cannot be assumed that a typical family will certainly have a loan rate which is higher or lower than the given rate in the foregoing scenario which is 6%. 2. 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. As regards with the Thomas family, given the circumstance that any of the couple loses a job, the family can expect to use their savings which serves as a safety net since they opt to save 1/12th of their monthly loan payment. While the Jeffersons cannot have this option as they do not have any savings. The choice of Thomas family to invest their savings in bonds/stocks is fully dependent on the performance of the market, hence the success not certain. If the market goes red, their investment will have a negative return. Otherwise, if the market goes green, their investment will yield a positive return. While as for the Jeffersons, they are moving closer to period of totally paying off their mortgage. A tax deduction for 30 years can be availed by the Thomas family. But eventually, such decreases each year due to the decrease in interest payments. The Jeffersons can avail the tax deduction for a short period, but they can sooner free themselves debt. 3. Comment on the merits of the advice you read from the two financial columnists. As regards to Ms. Epperson, I agree that the tax savings that can be derived from prioritizing to pay off the mortgage especially if the family does not have any other outstanding debts or if any family member has an unappropriated cash on hand. Anyone within the 25% tax bracket will be less likely to have a tax break; hence, it would then be better to pay off the mortgage when the rate is high. With reference to Mr. Williams, I agree on reinvesting the money that could have been saved instead of paying off the debt early. Investing with the bond or stock market will yield a higher rate of return, especially in a bull run, and will redound to more dollar benefits to the family.