Derrick is going to graduate from college in three months with a degree in crimi

Question

Derrick is going to graduate from college in three months with a degree in criminal justice. However, his real passion is real estate and he has found his dream home. Derrick has the option of getting a conventional loan or a balloon mortgage. He knows" he will be making more money when the balloon payments increase in three years. The monthly payment of the conventional loan is $1,000. The monthly payment for the balloon mortgage is $700 for the first three years, and then it jumps to $1,300 after that. At his current job, Derrick makes enough to cover a $1,000 mortgage payment. Is the conventional loan the better option for Derrick? Why or why not? 1 2 Should Derrick take advantage of the balloon mortgage? 3 Are there any better options available to Derrick that he 4 What would you advise Derrick to do in this situation? Explain your answer hasn't thought about yet? If so, what are they? Justify your answer.

Explanation / Answer

Derrick makes enough to cover a $ 1,000 for paying conventional loan monthly payment whereas he has another option to go with balloon mortgage where he has to pay comparatively lesser amount in initial 3 years and then it will jump towards $ 1,300. He should consider the below aspects before deciding options between -

1- Derrick should find out the interest which is applicable for these two options and compare it with the total interest outflow each month,

2- Derrick should look out for its investment options in case he opt balooon mortagage where he can save $1,300-$1,000=$300 in first three years and compare it with the income he could generate by using this 300$ comapring iit with the interest outflow,

3- Tax benefit should also be considered after taking care of its other income from all sources so that the analysis made as per point no.2 above can be evaluated after taking tax impact,

4- Lenght of its current job also to be considered and it is to be assumed that in initial years of service better to take less risk and hence consider of less outlfow in terms of any debt if he consider (after taking care all analysis discussed in the above points all togther),

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