As a teacher, I hope that I have some influence over students’ decision-making in the long term. So I bring my love of numbers and of money into the classroom every day. I just thought that I would share with you some questions off of my final exam from my MCF3M Summer School class.
3) Mr. Sadler purchased a house this spring for $217,000. He makes monthly payments at 5.25%.
a) Give three suggestions that I can use to pay off my loan sooner (3 marks)
We discuss this in class during the lessons, and I hope that these stick with them. Some solutions that I will accept are:
- pay bigger payments: I talk about rounding up your payments from the minimum (ex. if my bill is for $191.28, I will pay $200)
- pay more frequently: I talk about linking your payments to how frequently you get paid. Of course it is cheaper if you may every day on your mortgage, but if you get paid every other week, it makes sense to have your mortgage come out this day (rather than once per month)
- put down a lump sum payment: we talked about how the no-deposit loan has really hurt the United States, and that a 20 or 25% deposit will lower your interest rate on your loan as well.
- find a lower interest rate: I took this for a mark, because if you negotiate your mortgage to a lower rate (either at another bank or your current bank), you will save tonnes of money. Additionally I talked about credit cards in class and how you can call up your company and ask for a lower rate!
b) His mortgage is for 30 years. What are his monthly payments?
This is just a straight calculation question for my class, which most of them are happy to do.
c) Mr. Sadler is a smart guy and wants to pay off his mortgage in 11 years. What will his new monthly payments be, and how much interest will he save (as compared to paying it off in 30 years)?
This (along with part a) are the questions that I hope will stick with the students through the years. The answer is that for a 30 year mortgage you pay $431,380.80 and for a 11 year mortgage you pay $286,117.92 for a savings of 145,262.88. The only problem is that the 30 year mortgage payments are $1198.28 and the 11 year mortgage rates are $2167.56 (almost double) so it is not always feasible.
I also discuss with my class about slowly raising your minimum payments with raises, and slowly raising your savings, etc. We'll talk more about this in future posts, but I'd thought I'd share this as I finish marking these exams!