Your wealthy professor would like to live in a golfing community. A house is for

Question

Your wealthy professor would like to live in a golfing community. A house is for sale in Greenbryer. The purchase price is $899,900. Assume that your professor is willing to pay the full asking price. The bank loves to make loans to professors and has given the following terms: 3.5% APR compounded quarterly, 15% down payment, a term of 5 years, monthly payments, and an amortization period of 25 years. Assume there are no other fees. How much is the initial mortgage principal How much would the mortgage payments be Is this mortgage conventional Why

Explanation / Answer

Part A)

Since, the professor would make 15% as down payment, the balance amount of loan (85%) would be the amount of initial mortgage principal. The amount of initial mortgage principal is calculated below:

Initial Mortgage Principal = 899,900*85% = $764,915

__________

Part B)

The amount of monthly payment can be calculated with the use of PMT function/formula of EXCEL/Financial Calculator. The function for PMT is PMT(Rate,Nper,PV,FV) where Rate = Interest Rate, Nper = Period, PV = Present Value and FV = Future Value (if any)

__________

Here, Rate = Effective Monthly Rate = (1+3.5%/4)^(4/12) - 1 = .29%, Nper = 25*12 = 300 [we will take amortization period for calculating payment], PV = $764,915 and FV = 0

Monthly Payment = PMT(.29%,300,764915,0) = $3,821.14

__________

Part C)

No, this is not the case of conventional mortgage. For a mortgage to be conventional, the borrower is required to pay atleast 20% of the value of the purchase price. Here, the professor makes only 15% of the purchase price as the downpayment and would, therefore, not be considered as conventional mortgage.

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