Mr. Jones has $4,000 as monthly income. He has $50,000 invested in a portfolio of stocks with an average annual return of 6%. Mr. Jones wants to buy a house and he has narrowed down his choices to two houses. House A is $400,000 and House B is $209,900.

If Mr. Jones buys House A with a 30-year fix-rate mortgage plan, his estimated monthly principal, and interest payment will be about $2,398.20 (not including insurance or PMI). Since Mr. Jones did not put any money down, he has to pay $80 as monthly private mortgage insurance with a property tax of $6000 annually. Mr. Jones monthly PITI will be $2978.20 (2398.20 + 80 + 6000/12). However, one of Mr. Jones friends says that House A has a big potential for value increase. He suggests that Mr. Jones take an interest-only mortgage. If Mr. Jones were to take this option, his monthly PITI will be about $2,580 (total interest paid per year = 400,000*6% = 24,000, hence monthly mortgage payment = $24,000/12= 2000, PITI= 2000 +80+6000/12 = $2580). With an interest only period of 7 years, Mr. Jones will have a monthly PITI of $2,000.00.

If Mr. Jones decides to purchase House B with a 30-year fix-rate mortgage, his estimated monthly payment will be about $1,258.46 (not including property insurance or PMI)

5. Because he did not put any money down, he has to pay $50 as private mortgage insurance. The property tax for House B is $3000 annually. What will be Mr. Jones monthly PITI?

6. If Mr. Jones puts $40,000 as a down payment, he does not need to pay private mortgage insurance. Should he do so?

7. If Mr. Jones asks your advice about which house he should buy and what mortgage should he take, what will be your suggestion?