You can afford to pay up to $2000 in payments every month for housing and have $

Question

You can afford to pay up to $2000 in payments every month for housing and have $80,000 in savings (you don't anticipate and increase in income/savings). Which of the following mortgages would allow you to buy the most expensive property?

A. A 25 year FRM with 2.5% contract interest rate and .9 LTV.

B. A 30 year fully amortizing FRM with 4.2% contract interest rate and .85 LTV.

C. A 30 year FRM with 4.2% contract interest rate, .9 LTV and a balloon payment of $80,000 at the end of the 5th year.

D. A 30 year mortgage with an interest only period of 5 years at a fixed contract rate 3% and 0.95 LTV.

Answer is NOT D

Explanation / Answer

a.First we calculate with a payment 2000 and an interest rate of 2.5% for 25 years, what is the value of the house you can purchase.

Value of the loan = PV(rate,nper,pmt) =PV(0.025/12,25*12,2000) = 445,814

Price of the property would be 445,814/0.9 = 495,348. You can use only 50,000 of your 80,000 for the down payment. Max value of property with option (a) = 495,348

b.Now we do the same with option B

Value of loan = PV(0.042/12,30*12,2000) = 408,983

Price of property would be = 408,893/0.85 = 481,156 with option (b)

c.Value of loan = PV(0.042/12,30*12,2000) = 408,983

Present value of the house = 408,983/0.9 = 454,246. He has to pay 80,000 in ballon in 5th year. SO he will not have enough savings for the down payment

So the best option is option A

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