William is planning to buy a house and is investigating various mortgage options

Question

William is planning to buy a house and is investigating various mortgage options He and his friend Mark are looking at William's bank web site which contains a table showing the various mortgage options available as of today. The table below reflects the interest rate, term, and monthly payment for the S200.000 mortgage loan that William needs to borrow. Real Estate Taxes and Insurance payments on the home are $2400 per year William has budgeted $1500 per month for the monthly housing payment to the bank William estimates he will remain in the home for five years before he will need to sell the property. Which of the mortgages would be the most advantageous for William?

Explanation / Answer

William can pay maximum 1500 per month for monthly housing payment. Monthly taxes and insurance cost is 2400/12 =200. That means William can pay maximum 1500-200 =1300 per month for amortization of loan. Therefore, He cannot consider choice D and

Since, he is expected to live in the home for a very short period of time and he will sell it out after that, there is no sense for buying discount points as it will increase the cost of borrowing.

Hence, most advantageous mortgage choice for Williams is choice A.

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