Mr. and Mrs. Cally are in the process of buying a home for $240,000 and are cons

Question

Mr. and Mrs. Cally are in the process of buying a home for $240,000 and are considering the following home mortgage financing options:

Option 1- 20% down payment, 15 year mortgage and 3.5% interest with 2% closing costs.

Option2- 10% down payment. 30 year mortgage and 4.5% interest with 3.5% closing costs.

a. what is the APR for option 1? APR for option 2?

They plan to live in the home for 5 years and then sell the hoem and move to Texas. They believe that they housing market with appreciate 4% per year in this are for the next 5 years.

b. What is the expected home's value in 5 years?

c. What is the outstanding loan balance in 5 years for option 1: ? for option 2: ?

d. What is the expected equity after 5 years for option 1:? for option 2:?

e. What is the annual rate of return on the cash used to purchase the home? Option 1:? Option 2:?

f. Based upon the rate of return on the cash used to purchase the home, which financing option do you recomment for the inteded 5 year holding period?

Explanation / Answer

Option I Option II Cost of Home 240000 240000 Down Payment 48000 24000 Finance 80%/90% 192000 216000 Rate of Interest 3.50% 4.50% Term 15 year 30 year Closing Cost 3840 7560 Finance COST 104640 299160 Cost per year 6976 9972 APR 3.63% 4.62%

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