Malcolm and Shannon purchased their first house with a $180 000 mortgage. Their 5-year mortgage had a 7.5% semi-annually compounded interest rate, and was amortized over 25 years. Payments were made monthly.
After 3 years, interest rates had fallen significantly. In response, Malcolm and Shannon considered paying out the old mortgage (in spite of the interest penalties), and negotiating a new mortgage at the lower rate. They met with the loans officer at their bank, who laid out their options for them.
Interest on mortgages with a 5-year term was 5.5% compounded semi-annually, the lowest rate in many years. The loan officer informed Malcolm and Shannon of the penalty for renegotiating a mortgage early, before the end of the current term. According to their mortgage contract, the penalty for renegotiating the mortgage before the end of the 5-year term is the greater of:
S. A. Hummelbrunner, Kelly Halliday, Ali R. Hassanlou, K. Suzanne Coombs. (2016). Contemporary Business Mathematics with Canadian Applications (11th Canadian Edition) [Texidium version]. Retrieved from http://texidium.com
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