Question
You expect to live in a house you are planning to own for 5 years, with a $200K loan. You could get a 3/1 ARM
You expect to live in a house you are planning to own for 5 years, with a $200K loan. You could get a 3/1 ARM amortized over 15 years at 2.9 % or a fixed 15 year loan at 5.0%. Assume the upfront costs and insurance under both loan options are the same. Moreover, suppose the expected interest rate of the ARM for years 4 and 5 is 6%. MARR is 10% per year compounded monthly. Which loan would be a better choice (i.e. has lower discounted interest costs)? Just consider the PV of the payments (principle and interest), do not consider tax benefits of interest, or any differences in ownership equity at the end of the loan term.
a.ARM Loan (PV)
b.Fixed Loan (PV)
c.Your choice?____________________________
2) You are planning to buy a house. Assume that you have the cash to pay 20% down payment on any home that your $1,400/month maximum payment can afford including taxes and insurance (no PMI required). A lender offers you a 30 year fixed mortgage for the remaining 80% with 5% APR with 2 points and $2,000 in fees. Property taxes are $3,600 and Casualty Insurance is $1,200 annually (Assume these amounts are not dependent on the price of the house you buy).
How expensive of a home can you purchase today?________________
What would your TOTAL amount due at closing be?________________
3) Assume that you are 10 years into a 30 year home loan at 5%. You owe $200,000 left on your home at this time. You can refinance your loan at 4% for 20 years; however the TOTAL closing costs will be around $3,000.
4) a.If you go for refinancing, how many more months would you need to live in the home in order to get the closing cost back? Ignore time value of money and tax credits of the interest payments (i.e. Simple Payback)_______________
b.Answer part (a) again considering time value of money and MARR 10% compounded monthly. Ignore tax credits of interest again _______________
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