You are interested in buying a house that costs $300,000. You plan to make a 20%

Question

You are interested in buying a house that costs $300,000. You plan to make a 20% down payment and borrow 80% of the purchase price. You will issue a mortgage loan (yes, the borrower is the issuer of the mortgage loan) to the bank who is lending you the money. The term of the mortgage loan is 15 years. The interest rate is fixed at 5% per year. Let’s assume yearly rather than monthly payments for this problem set. Keep in mind that your mortgage loan will be fully amortized (paid off) after the end of fifteen years.

What are your total pretax monthly mortgage payments:

Here are the Excel terms that you will need to calculate your pre-tax mortgage payments:

rate: 5%
nper:15
pv: $240,000
fv: 0
type: 0

$17,890.10

$23,122.15

$5,868.05

$22,345.16

$17.254.10

Adjustable rate mortgages shift risk from the borrower to the lender.

True

False

Some of the recurring costs associated with either renting or owning a home are uncertain. You must budget for these uncertain costs to limit the chances of financial distress.

True

False

$17,890.10

$23,122.15

$5,868.05

$22,345.16

$17.254.10

Adjustable rate mortgages shift risk from the borrower to the lender.

True

False

Some of the recurring costs associated with either renting or owning a home are uncertain. You must budget for these uncertain costs to limit the chances of financial distress.

True

False

Explanation / Answer

Loan amount = 80% of purchase price

Loan amount = 0.80 * $ 300,000

Loan amount = $ 240,000

Using the PMT function in excel, output shown below, the pretax mortgage payment equals $ 23,122.15 per year.

_________________________________________________________________

The correct choice is false

Explanation : - Adjustable-Rate Mortgages Adjustable-rate mortgages (ARMs) shift the risk—or reward-of changing interest rates from the lender to the borrower, with corresponding changes in the monthly payment or (occasionally) in the amount borrowed or in the number of payments remaining ( term) .

____________________________________________________________________

The correct choice is false

Explanation : - The recurirng costs associated with renting such as monthly rent or recurring cost associated with owning a home such as property taxes, insurance are highly certain as their costs are previously known.

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