You are given with the following information of two proposals of

financing programs for your home loan. Suppose the new house costs you $600,000

(sales taxes and others are included). One program is asking you to deposit a 20%

down payment on the $600,000 and it provides you with 2.6% interest rate for 15-

year monthly payments of the remaining balance, the other program is a 100%

financing program which gives you a 1.2% for the first 5 year plus the PMI (property

mortgage insurance) as $250 per month with a balloon payment as $580,000.(That is,

a lump-sum payment at the end of 5 th year). The mortgage rate increases to 4.6%

afterward for a 30-year mortgage if the balloon payment is not paid and refinancing is

applied (That is, the extended program is for 30 years not for the 25 years leftover).

Let there be no prepayment penalty. That is, you may pay off the loan should you

have some extra cash later on. The brokerage fees and commissions are already taken

into account in all the numbers given. Answer the following questions:

a) What is the monthly payment for each program in the first 5 years? Which one is

more favorable to you if your monthly income is $6,000 before tax? (Notice that

most lenders will require the borrower to have ratio between mortgage payment

and monthly income no greater than 33%).

b) Suppose 4 years later, the market price of your house is $760,000. The tax rate on

gains/losses on house sales is 6%. Will you consider selling this house and buy a

bigger one if your income has gained to $8000 per month? What is the

annualized rate of return net of your financing cost in your housing investment

for each financing program?