You are planning to buy a house. Assume that you have the cash to pay 20% down p

Question

You are planning to buy a house. Assume that you have the cash to pay 20% down payment on any home that your $2,400/month maximum payment can afford including taxes and insurance (no PMI required). A lender offers you a 30 year fixed mortgage for the remaining 80% with 4.5% APR with 1.5 points and $2,000 in fees. Property taxes are $3,600 and Casualty Insurance is $1,200 annually (Assume these amounts are not dependent on the price of the house you buy).

How expensive of a home can you purchase today?________________

What would your TOTAL amount due at closing be?________________

SHOW YOUR WORK

Explanation / Answer

Here the monthly installment, that can be afforded has to be calculated.

the maximum monthly income that can be paid monthly( instalments) $ 2,400 *12 = $28,800.

total of annual property taxes and casual insurance $3,600+ $1,200 =     $4,800

so total amount that can be spent on home loan installments= $ 28,880 - $4800 = $24,000

so monthly instalment he can pay every month = $2,000.

I can purchase any house/ home in a way that my monthly installment shall not exceed $2,000 per month.

here I can also purchase 1.5 points from the vendor of the loan , from the down payment available to purchase the home. so that my APR is reduced from 4.5% to 3% ( 4.5% -1.5%).

so, the interset rate i can afford to pay will be 3%.

the payment to be made in 30years = 30 yrs *12= 360 months..

so the 80% of total amount paid for 30years, includuing interset (APR) = 360months * $ 2,000 = $720,000.

the present value of $720,000 after 30years at 3% discount rate.(80%)

$720,000*0.412 = $296,640.

so the 100% is $296640*100/80 = $370,800

So the 20% down payment =370,800*20%=$ 74,160.( apart from loan points purchsed and one time payment of fees)..

so intial investment = ( down payment + loan processing fee + purchase of 1.5 points to reduce the loan interest rate ( APR) to 3%.

1.so I can purchase a home with an total expense of $370,800.

2. the amount due at closing be will $ 2000 last installment payable..

NOTES: 1. It is assumed that as given , has down payment enough to pay for any home., so from that APR 1.5 points is purchased to reduce the loan interest rate to 3%.

2. the total amount at closing be at end of closing 359 months will be 2000. the question is not specific at closing be?., if at end of 360 months.. it will be nil.

3. The annual payment of Property tax and insurance go on annually.. ..irrespective of any home . $4, 800..

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