Bob & Betty Homebuyers will make an offer on 4980 Catoctin at a price of $565,000. They have savings of $130,000 to use for down payment and closing costs. If their office is accepted, they plan to close on November 30, 2018. They each earn $4,500 per month before taxes. They have a car payment of $250 per month, plus minimum credit card payments of $50 per month. They also have student loan debt of $50,000 with monthly payments of $150 per month. They could pay off their student loan balance out of savings, but that would reduce their cash available for down payment. They have good credit with a FICO score of 720.

They expect to live in this house for 5 years and then refinance to get cash out to buy another house. After 5 years, they plan to rent this property. They are considering 3 alternative 30-year fixed rate loan options:

loan 1- [ loan to value = 80%, rate = 4.875% , points= 0, High rate low points]

Loan 2- [Loan value= 80%, Rate= 4.625%, points= 1, lower rate]

Loan 3-[ Loan to value= 90%, rate = 5.125% , points = 0 , lower down payment]

Closing costs:

Lender Title Insurance will cost $1,250 Escrow costs will be $1,500

Prepaid finance charges [PFC] include lender underwriting, credit, appraisal, and processing that will cost $2,500, plus points.

Recording fee to county clerk will cost $150

Insurance for the first year will cost $900 Option

Current tax assessment is $3,600 per year payable from July 1, 2018 to June 30, 2019. The first tax bill will be paid by the seller on November 1, 2018. Therefore taxes will be paid to December 31, 2018.

Pro Rated charges:

Estimate annual property taxes for buyers at 1.25% of the purchase price. Divide by 12 months for monthly amount. Lender will collect 5 months of property taxes at closing.

Buyers will reimburse seller for property taxes, at sellers rate for the month of December, 2018 since property taxes will be paid to December 31, 2018.

Divide annual insurance cost by 12 for monthly insurance cost. At the close of escrow, lender will collect 2 months of insurance for reserves.

When their loan funds on November 30, 2018, they will owe 1 day of pre-paid interest at the close of escrow. Use a 360 day year to calculate prepaid interest. This is a prepaid finance charge.

Their first mortgage payment will be due January 1, 2019. Their payment will include principal, interest, property tax reserve for one month, plus 1 month of insurance reserve [PITI]. In addition, if they take the 90% LTV loan, they will owe mortgage insurance of 0.42% of the loan amount divided by 12 months each month.

The Annual Percentage Rate [APR] is Effective Borrowing Rate calculated using the principal, interest and mortgage insurance payment for the full 30-year term of the loan. However, the effective borrowing rate will use the loan amount less all prepaid finance charges.

They are offered an Adjustable Rate Mortgage with the interest rate that is fixed for 5 years with the following terms:

Start rate is 4%

Loan is 80% of the purchase price.

30 year amortization

Current index is 2.75%

Margin is 2.25

Initial change cap is 5

Subsequent interest change cap is 2

Life Cap is 5

Answer the following questions online:

1. How much will their monthly property tax reserve cost?

2. How much will their monthly insurance reserve cost?

3. Calculate the monthly Principal & Interest payment for Loan 1

4. Calculate their monthly PITI for loan 1.

5. Calculate the monthly Principal & Interest payment for Loan 2

6. Calculate their monthly PITI for loan 2.

7. Calculate the monthly Principal & Interest payment for Loan 3

8. Calculate their monthly mortgage insurance payment for loan 3.

9. Calculate their monthly PITI + Mortgage Insurance for loan 3.

10. Calculate their housing ratio for Loan 1. Enter as Decimal amount. For Example 51.54% is 0.5154.

11. Calculate their total debt to income ratio for Loan 1

12. If they take Loan 3, they will use the extra cash to pay off their student loans, so that payment goes away. Calculate their total debt to income ratio for Loan 3.

13. Calculate the total prepaid finance charges for Loan 1.

14. Calculate the total prepaid finance charges for Loan 2.

15. Calculate the total closing costs for Loan 2.

16. Calculate the total cash to close with Loan 2.

17. Calculate the total cash to close with Loan 3. Do not include the payoff of their student loans.

18. What is the APR for Loan 1? Enter the decimal amount. For Example 5.125% is 0.05125.

19. What is the Effective Borrowing Cost for Loan 1 if they pay it off with a refinance in year 5? Enter the decimal amount. For Example 5.125% is 0.05125.

20. What is the APR for Loan 2? Enter the decimal amount. For Example 5.125% is 0.05125.

21. What is the Effective Borrowing Cost for Loan 2 if they pay it off with a refinance in year 5? Enter the decimal amount. For Example 5.125% is 0.05125.

22. Which loan has the lower effective cost to borrower for 5 years?

23. What is their total monthly debt if they take Loan 2?

24. What is their total monthly debt if they take Loan 3? (Student loan is repaid for this option.)

25. What is the fully indexed rate of the ARM at origination? (Enter Decimal Amount. 7.5% would be 0.0750

26. What is the loan balance of the Adjustable Rate Mortgage [ARM] at the end of year 5?

27. What is the maximum interest rate for the ARM in year 6? Enter decimal amount.

28. Calculate the payment for year 6 for the ARM.