One of Andrew and Cynthia's goals is to buy a bigger house. Since mortgage rates have fallen significantly, they want to look into purchasing the home earlier than expected. Cynthia will also receive a $18,000 inheritance to contribute towards the down payment and the closing costs of the house. The house they want to buy costs $177,550 and they plan to put 20% down. They have made a few phone calls and found that Guaranty Federal Savings is offering very competitive financing terms. Andrew and Cynthia were offered the following mortgage terms:

15-year fixed-rate mortgage

• 3.25% interest with .5 discount point
• Other closing costs and prepaid items of $5,500 (this includes a 1% loan origination fee)
• Monthly payments

 

15 year adjustable rate mortgage

• 2.5% interest with 3 discount points
• Other closing costs and prepaid items of $5,500 (this includes a 1% loan origination fee)
• 1.5% annual interest rate cap
• 6% overall interest rate cap
• Monthly payments

1. Compare and evaluate the two mortgage alternatives for Andrew and Cynthia. What would be the front-end costs and the monthly payments for principal and interest on each of these mortgages? How much could the monthly payments for principal and interest go up on the adjustable rate mortgage after the first year? Over the lifetime of the loan? Keeping in mind their financial situation and risk tolerances, which mortgage would you recommend for them? Why?
2. In addition to a 3.25% fixed-rate mortgage with .5 discount point, the lender offers a 3.4% fixed-rate mortgage with 0 discount points. Compare the difference in monthly payments and front-end costs for these two mortgage options (assuming all else remains the same). How many months would Andrew and Cynthia need to keep the 3.25% mortgage in order to offset its higher front-end costs, or "break-even?" Assume they want to keep the home for the rest of their lives. Which of these fixed-rate mortgages would you recommend for the Bates family? Why?

Answer rating: 100% (QA)

ANSWER Fixed vs Adjustable Rate Mortgage for Andrew and Cynthia Analysis of Fixed vs Adjustable Rate 15year Fixed Rate Interest Rate 325 Discount Points 05 points cost 05 loan amount Closing Costs 550... View the full answer