Mr. Jones has $4,000 as monthly income. He has $50,000 invested in a portfolio o

Question

Mr. Jones has $4,000 as monthly income. He has $50,000 invested in a portfolio of stocks with average annual return of 6%. Mr. Jones wants to buy a house and he has narrowed down his choices to two houses. House A is $400,000 and House B is $209,900.

1. What will be his monthly mortgage payment if he buys House A by taking a 30-year fix-rate mortgage? (Assume he borrows the whole amount and mortgage interest rate is 6%)

2. Because he did not put any money down, he has to pay $80 as monthly private mortgage insurance. The property tax for House A is $6000 annually. What will be Mr. Jones’ monthly PITI?

3. One of his friends says that House A has a big potential of value increase. He suggests that Mr. Jones should take an interest-only mortgage. What will be the monthly mortgage payment for this option? What will be his monthly PITI? (Mortgage interest rate is 6%)

4. What will be his monthly mortgage payment if he buys House B by taking a 30-year fix-rate mortgage? (Assume he borrows the whole amount and mortgage interest  rate is 6%)

Explanation / Answer

1.
Monthly payment=PMT(6%/12,12*30,400000)=$2,398.20
2.
PITI=Principal+Interest+Taxes+Insurance=Monthly payment+Monthly taxes+Monthly insurance=2398.20+80+6000/12=$2,978.20
3.
Interest only loan
total interest paid per year=400000*6%=24000
hence, monthly mortgage payment=24000/12=2000
PITI=2000+80+6000/12=2580
4.
Monthly payment=PMT(6%/12,12*30,209900)=$1,258.46

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