You are offered two choices for financing your house, valued at $ 200,000 as fol

Question

You are offered two choices for financing your house, valued at $ 200,000 as follows:

A. a 90 percent LTV fixed rate 30-year mortgage at 6.00 percent. it will require private mortage at insurance for nine years ( until the loan is reduced to 78 percent of value) , effectively increasing the payment as if the loan were a 6.75 percent loan for nine years.

B. an 80 percent LTV first mortage , fixed rate , 30 years at 6.00 percent. (no mortage insurance is required because the loan is 80 percent of value.) a " piggyback" second mortgage for 10 percent of value of the house with an effective borrowing cost of 8.00 percent and a maturity of nine years is required too.

you expect for financing to be in place for seven years. if there is no difference in the upfront cost of the two arrangement which would be the better choice financially? Why?

9. You are offered two choices for financing your house, val. because the loan is 80 percent of value.) A "piggyback econd mortgage for 10 percent of value of the house with an effective borrowing cost of 8.00 percent, and a maturity of nine years is required too. ued at $200,000, as follows: a. A 90 percent LTV fixed rate 30-year mortgage at 6.00 percent. It will require private mortgage insurance for nine years (until the loan is reduced to 78 percent of value), effectively increasing the payment as if the loan You expect for the financing to be in place for seven years. If there is no difference in the upfront cost of the two arrangements, which would be the better choice financially? Why? were a 6.75 percent loan for nine years. b. An 80 percent LTV first mortgage, fixed rate, 30 years at 6.00 percent. (No mortgage insurance is required

Explanation / Answer

For First Case:

The LTV is 90% that means for $200,000, the loan amount is $180,000

Since, it requires private mortgage for 9 years with effective rate as 6.75% and remaining 21 years as 6.00% interest rate.

So total cost is for first 9 years is

180,000 * (1+0.0675)^9          = $324,028

For remaining 21 years

180,000 * (1+0.06)^21            = $611,921

Total = $611,921 + $324,028 = $935,949

For Second Case:

The LTV is 80% that means for $200,000, the loan amount is $160,000

Since, The loan rate 6.00% fixed rate for 30 years.

So total cost is for 30 years is

160,000 * (1+0.06)^30            = $918,958

For 10% of LTV the piggback amount at 10% interest rate for 9 years is

20,000 * (1+0.1)^9      = $47,158

Total = $918,958 + $47,158 = $966,116

Based on the calculation, it appears that first option would be better for financial house. The cost be $30,167 less from second option.

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