Real Estate Cost of Financing (APR) Problem Assignment 7

Calculating the Annual Percentage Rate

1.1) A married couple are comparing the financing costs for the purchase of a $250,000 home.

The couple have good credit and the required down payment, and as a result, can obtain a conventional mortgage loan with an 80 percent loan to value mortgage at a rate of 3.75% for a term of 30 years. Closing costs for the conventional loan are 3% of the amount of the new mortgage.

Compute the following for the conventional mortgage loan:

A) Down Payment Required $___________ Amount of the Total Closing Costs $__________

B) Amount of the new mortgage loan $___________

C) Monthly Mortgage Payment Required $______________ Annual Percentage Rate %___________

1.2) Alternatively, the couple could obtain FHA mortgage financing with a 95 percent loan to value mortgage on the same property at the rate of 4.75% for 30 years and 4% closing costs. However, with the FHA loan, an additional 1.75% is required at closing for the FHA mortgage insurance premium in addition to the 4% closing costs. Also, an additional .8% of the outstanding mortgage loan balance is added to the monthly FHA mortgage payment for the required FHA mortgage insurance annual premium.

Compute the following for the FHA mortgage loan:

A) Down Payment Required______________ Amount of the Total Closing Costs $______________

B) Amount of the new mortgage loan $_______________

C) Monthly Mortgage Payment including FHA Insurance: ___________ Annual Percentage Rate_________

Which type of home mortgage is likely to be the one that you select to purchase your first home?

Explain your answer:

1.3) What are the differences in the Conventional versus the FHA mortgage Loan?

A) Conventional Loan down payment plus Closing Costs = $_____________

B) minusFHA Loan down Payment, Closing Costs and up front FHA Insurance = $_____________

C) = Additional total cash outflow required for the Conventional loan = $______________

D) Total FHA Monthly Mortgage Payment including FHA Insurance=$___________

E) minusConventional Monthly Mortgage Payment $_____________

F) = Differencein Monthly Payments $________________

1.4) What is the difference in the amount borrowed between the conventional and FHA Mortgages including down payment, closing costs and required FHA insurance?

A) FHA Loan Amount______________ minus Conventional Loan Amount ____________

B) = Additional Amount Borrowed with the FHA loan$_____________

C) What is the Incremental cost of borrowing the additional funds? ________________%

Show all of your work in your analysis.