Question
Please show how you got answers!! Problem 3 [25 points] : Suppose you borrow $250,000 PLAM (Price Level Adjusted Mortgage) for 30 years, monthly payments
Please show how you got answers!!
Problem 3 [25 points]:
Suppose you borrow $250,000 PLAM (Price Level Adjusted Mortgage) for 30 years, monthly payments with $6,000 origination cost. The mortgage rate is 6% with annual outstanding balance adjustments based on the following inflation information:
inflation information
Year Home Price
1 4%
2 -5%
3-30 0
Questions:
- What is the APR for this loan? [10 points]
- What is the effective cost if holding the loan for only 5 years? [8 points]
- What is the effective cost of this loan if holding only for 1 year? [7 points]
Problem 4 [25 points]:
You decide to buy a house of $250,000 with loan amount of $200,000 and you plan to sell the house in year 10. The lender offers the following three SAM choices with $5,000 origination cost for each choice:
- $200,000; 30 years; monthly payment; 0% interest rate; 50% of appreciated value of the property in year 10. In addition, if the property is sold for a loss in year 10, the lender pays nothing.
- $200,000; 30 years; monthly payment; 3% interest rate; 50% of appreciated value of the property in year 10
- $200,000; 30 years; monthly payment; 5% interest rate; 25% of appreciated value of the property in year 10
The housing market conditions:
- Home price will appreciate 30% in total for the next 10 years;
- Home price will stay the same for the next 10 years
- Home price will decline 30% in total for the next 10 years.
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