Problem statement: Use this situation for the following problems: You plan to purchase a home for $250K. Assume that your loan rate is 4.2% nominal annual with monthly payments, you put 10% down plus $1,000 in closing fees in addition to 1 point. Since you put down only 10% you need to pay $100/month for PMI. You also owe $1,200 a year for Insurance and $2,400/year for property taxes.
1) What is your total mortgage payment for a 30 year loan?___________
2) What is the total amount of money you owe when you close the loan (sign the papers)?__
3) Assume that you could get a 3-1 ARM (amortized 30 years) at 3.5% and that you expect rates to go to 4.5% in your 4th year and 5.5% in your 5th year and onwards. What is your loan payment for each of those years?
Year 1-3___________________
Year 4_____________________
Year 5onwards_____________________
4) If you plan to stay in the home for 5 years, is it better to get the 4.2% Fixed Rate loan or the 3.5% ARM? (note: consider that you have an 8% MARR and you ignore the difference in equity value of the home at the end of 5 years. In other words, just compare the different in the PV of your payments at your MARR)___________________
5) Now assume that you can afford to make $1,800 in mortgage payments today and that your parents are going to give you 10% of the purchase price of your home and pay all of your closing costs. Using the Fixed Rate Loan information from the problem above, what is the most expensive home you can purchase with your $1,800/month?_________________________
Assume that you are 10 years into a 30 year FRM home loan from problem 1. You can refinance your loan at 3.2% with 2 points plus $2,000 in fees. For the next few questions.
6) You just completed your 120th payment (10 years) how much do you owe on the home?_______________
7) How many months do you need to stay in the home to break even? (using Simple Payback)_______________
8) How many months do you need to stay in the home to break even? (MARR 8% compounded monthly) _______________