Belinda Johnson’s parents and maternal grandmother have combined their finances and presented Harry and Belinda with $35,000 with which to purchase a home. The Johnsons have shopped and found a house in a new housing development that they like very much. They could either borrow from the developer or obtain a loan from one of three other mortgage lenders. The financial alternatives and data for the home are summarized in the table below.

(a) Which plan has the lowest total up-front costs? The highest?

(b) What would be the full monthly payment for PITI and PMI for each of the options?

(c) If the Johnsons had enough additional cash to make the 20 percent down payment, would you recommend lender 1 or lender 2? Why?

(d) Assuming that the Johnsons will need about $3000 for moving costs (in addition to closing costs), which financing option would you recommend? Why?

Financing Details on a Home Available to the Johnsons

Price: $190,000. Developer A will finance the purchase with a 10 percent down payment and a 30-year, 5 percent ARM loan with 2 interest points. The initial monthly payment for principal and interest is $917.96 ($171,000 loan after the down payment is made; 171 3 $5.3682). After one year, the rate rises to 5.5 percent, with a principal plus interest payment of $961.15. At that point, the rate can go up or down as much as 2 percent per year, depending on the cost of an index of mortgage funds. There is an interest-rate cap of 5 percent over the life of the loan. Taxes are estimated to be about $1800, and the homeowner’s insurance premium should be about $700 annually. A mortgage insurance premium of $88 per month must be paid monthly on the two 10 percent down options.

Home: Price. S190,000; Taxes, $1800; Insurance. 5700 Developer A 30-year ARM 5.0% $ 19,000 171,000 3,420 917.96 88 Lender 1 Lender 2 Lender 3 15-year CON 20-year REN 5.5% $ 19,000 171,000 5,130 1176.29 88 Loan term and type Interest rate Down payment Loan amount Points Principal and interest payment PMI 30-year CON 5.5% $ 38,000 152,000 1,520 863.04 6% $ 38,000 152,000 1282.66 "Aduntable-rate mortgage "Conventional "Renegotiable every five years