Problem
Tom has come to you for advice regarding his home mortgage. He bought a house for $1.2 million. To finance the purchase of his home, he took out a mortgage for $865,000. The interest rate on the mortgage is 3.85% (APR) and it is amortized for 25 years. Tom tells you that the replacement cost of the house is $980,000.
• Tom tells you he can pay $1,100 bi-weekly towards his mortgage. How long will it take Tom to pay off the mortgage?
• Explain to Tom the amount of homeowner's insurance he should buy and give your reasons. Assume his insurance company has an 80% coinsurance factor.