Compound Interest: Mortgages and Investments (Part I) The retirement goals of most Americans include a paid-for home and a nest egg for investment income. In this assignment you will consider a couple of scenarios in which you pay off a home mortgage and invest for retirement over a 30-year period. And whether its paying a loan or investing in an annuity, compound interest plays a key role. As we will see in this assignment, the "magic" of compound interest can either work for you or against you; understanding the math involved can quite literally mean the difference between retiring a millionaire and praying that Social Security lasts long enough. As you begin your career and think about starting a family, you decide to purchase a home with a $200,000 mortgage loan. While there are many factors that must be taken into account, here we consider two basic options. (Refer to the Example of Calculating Mortgage Payments handout for details on the necessary computations.) 1. Suppose you are considering a 30-year fixed-rate mortgage. (a) The website www.freddiemac.com/pmms/pmms30.htm contains data from the Primary Mortgage Market Survey, and lists historical interest rate information for loans of the type you are considering. Go to this website and locate the "Annual Average" rate for a 30-year fixed-rate mortgage in 2013. (b) Using the interest rate found in part (a), determine the monthly payment on this mortgage. (c) What would be the total amount required to pay off the loan? (d) How much total interest would you pay? 2. You have heard that there are benefits to paying off your house sooner, so you decide to compare the above 30-year mortgage to a shorter 15-year loan. (a) The website www.freddiemac.com/pmms/pmms15.htm lists historical interest rate information for loans of this type. Go to this website and locate the "Annual Average" rate for a 15-year fixed-rate mortgage in 2012. (b) Using the interest rate found in part (a), determine the monthly payment on this mortgage. (c) What would be the total amount required to pay off the loan? (d) How much total interest would you pay? 3. Compare your results from questions 1 and 2 to answer the following: (a) How much more (or less) would you pay per month on the 15-year loan? (b) How much more (or less) would you pay over the life of the 15-year loan compared to the 30-year mortgage? 4. Write a 3-5 sentence paragraph describing which of the above methods of payment you would choose. Incorporate your answers from the previous questions. Also take into account any other considerations you may have, such as current lifestyle versus future lifestyle. (Would you rather pay less now so that you have more to spend, or spend less now to pay off the loan and free up that money sooner?)