Mr. Jones has $4,000 as monthly income. He has $50,000 invested in a portfolio o

Question

Mr. Jones has $4,000 as monthly income. He has $50,000 invested in a portfolio of stocks with average annual return of 6%. Mr. Jones wants to buy a house and he has narrowed down his choices to two houses. House A is $400,000 and House B is $209,900.

1. What will be his monthly mortgage payment if he buys House A by taking a 30-year fix-rate mortgage? (Assume he borrows the whole amount and mortgage interest rate is 6%)

2. Because he did not put any money down, he has to pay $80 as monthly private mortgage insurance. The property tax for House A is $6000 annually. What will be Mr. Jones

Explanation / Answer

1. EMI of house A = [P x R x (1 + R)n] / [(1 + R)n - 1] = [400,000 x 0.005 x (1 + 0.005)360] / [(1 + 0.005)360 - 1] = $2,398.20

2. Monthly Property tax = 6,000 / 12 = $500
PITI = 2,398.20 + 80 + 500 = $2,978.2

3. Monthly mortgage payment = 400,000 x 0.06 x 1/12 = $2,000
PITI = 2,000 + 80 + 500 = $2,580

4. EMI of house B = [P x R x (1 + R)n] / [(1 + R)n - 1] = [209,900 x 0.005 x (1 + 0.005)360] / [(1 + 0.005)360 - 1] = $1,258.46

5. Monthly Property tax = 3,000 / 12 = $250
PITI = 1,258.46 + 50 + 250 = $1,558.46

6. No he should not do so since down payment is very huge as compare to his monthly income. Still, if he choose to made down payment then he would have to make dis-investment which would not be a better idea. Also, the amount of private insurance is almost negligible as compare to his income, so no need to eliminate it. Thus, he should not make a down payment.

7. If the fact that House A has potential growth is true then Mr. Jones should go for House A although it has very high PITI. Interest only mortgage should be choose in this case.
    But the fact is not true, Mr. Jones can also go for House B since he has come across to both the houses, this means that he is equally satisfied with any of the house. So when he can be equally satisfied with the lesser PITI why to spend higher. Thus, he can go for House B otherwise since its PITI is very less.

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