4. (a) You buy a house today. It costs $180,000. You pay down $30,000 and financ
ID: 2551054 • Letter: 4
Question
4. (a) You buy a house today. It costs $180,000. You pay down $30,000 and finance the balance. You get a 30 year fixed rate loan at 5%. Assume you will make annual payments of principal and interest and we will ignore property tax and insurance. How much will your annual house payments be? (b) How much did you end up paying for your house over 30 years? (c) What if the bank is offering a special fixed rate of 4% if you finance this house for 15 years? What would the annual payments be in this case and how much would you end up paying in total? (d) What does it mean when a mortgage is "under water"? 5. (a) You buy a piece of art work for $2,500. You sell it six years later for $4,935. What rate of return (i) did you earn on your investment? (b) In your opinion, was this a good investment? Explain why or why not.Explanation / Answer
4) a) Cost of house = $180,000
Down Payment = $30,000
Balance to be paid over 30 years = $180,000 - $30,000 = $150,000
Annual House Payments = $150,000/PVAF(30 yrs, 5%)
= $150,000/15.372451 = $9,757.72
Therefore annual house payments will be $9,757.72
b) Total Payments for house over 30 years = Down Payment+(Annual house payments*30 yrs)
= $30,000+($9,757.72*30 yrs)
= $30,000+$292,731.60 = $322,731.60
c) Annual house payments if loan is for 15 yrs = $150,000/PVAF(15 yrs, 4%)
= $150,000/11.11838743 = $13,491.17
Total Payments for house over 15 years = Down Payment+(Annual house payments*15 yrs)
= $30,000+($13,491.17*15 yrs)
= $30,000+$202,367.55 = $232,367.55
d) An underwater mortgage is when the balance of the mortgage loan is higher than the fair market value of the property. For example, if mortgage is $600,000 but the market value of home is only $550,000. It means mortgage is $50,000 ($600,000 - $550,000) more than the value of home. In this case mortgage is underwater.
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