Charlie is attempting to raise 200,000 through a mortgage from First Loan Company in order to purchase a house for 290,000. They find the company is willing to lend a standard fixed-rate mortgage at j2=8% (2 is compounding frequency) for a six-year term with an amortization period of 25 years. However, Charlie is uncomfortable with the level of monthly payment this implies. The loan officer suggests him to consider a SAM (Shared Appreciation Mortgage). This loan is available at j₂=6% also for a six-year term. The loan would be fully amortized over 25 years with monthly payments. If Charlie takes this option, however he will be obligated to give the First Loan Company 20% of the gain in the property value at the end of the term when he expects to sell the property. Charlie has been doing research, which shows that it is reasonable to expect house price grows 7% per year in the near future. As such, should he choose SAM? Yes or No. Explain by comparing with the standard fixed rate mortgage. 

Answer rating: 100% (QA)

To determine whether Charlie should choose the Shared Appreciation Mortgage SAM option over the stan... View the full answer