Problem 3

You decide to buy a house of $250,000 with loan amount of $200,000. The lender offers the following three SAM choices with $5,000 origination cost for each choice:

(1) $200,000; 15 years; monthly payment; 0% interest rate; 50% of appreciated value of the propertyin year 10. In addition, if the property value declines in year 10, the lender pays nothing.(2) $200,000; 15 years; monthly payment; 3% interest rate; 50% of changed value of the property in year 10 (3) $200,000; 15 years; monthly payment; 5% interest rate; 25% of changed value of the property in year 10.

The housing market conditions:

a) Home price will appreciate 50% in total for the next 10 years; b) Home price will stay the same for the next 10 years c) Home price will decline 50% in total for the next 10 years.

Question:If you hold the loan for only 10 years, please find out the best choice for each market condition.