Question
You have just completed a BS degree in engineering and are going to pursue a MS degree. The program will require 2 years, at which
You have just completed a BS degree in engineering and are going to pursue a MS degree. The program will require 2 years, at which time you will likely go to work in the same city due to the preponderance of excellent industry there. You have decided this is a great time to purchase a house rather than pay rent. You plan to live in the house for 3 years and then upgrade. The house you wish to buy costs $90,000, and after a down payment of $4,500 you will finance $85,500. Being short on cash, you want to consider both low payment loans and those requiring lowest cash to close. You are considering three loans: (1) a 30-year conventional for 6.750 percent with 0.125 percent in points plus $4,065.13 in closing costs, (2) a 30-year ARM loan at 5.250 percent with 2.375 percent in points plus $5,991 in closing costs, and (3) a 30-year balloon loan at 4.850 percent, 1.100 percent in points, plus $6,500 in closing costs. Since the ARM in part (2) can go either up or down by 100 basis points per year (1 percent) you wish to evaluate it both (i) remaining constant over the 3 years, and (ii) under the worst-case result where it starts at 5.250 percent and in the second and each subsequent year it increases by 1 percent.
1) For each loan, determine the monthly payment (years 1 through 3 for the ARM).
2) Perform a PW analysis, assuming you continue to own the house exactly 3 years. Your TVOM is 5.3 percent.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started