Suppose you are going to buy a home worth $110,000 and you make a down payment in the amount of $50,000. The balance will be borrowed from the Capital Savings and Loan Bank. The loan officer offers the following two financing plans for the property.€¢ Option 1. A conventional fixed-rate loan at an interest rate of 13% over 30 years with 360 equal monthly payments.
€¢ Option 2. A graduated payment schedule (FHA 235 plan) at 11.5% interest with the monthly payment schedule given in Table P4.84.
For the FHA 235 plan, mortgage insurance is a must.
(a) Compute the monthly payment under option 1.

(b) What is the effective annual interest rate you are paying under option 2?
(c) Compute the outstanding balance at the end of five years under each option.
(d) Compute the total interest payment under each option.
(e) Assuming that your only investment alternative is a savings account that earns an interest rate of 6% compounded monthly, which option is a better deal?

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Year (n) Monthly Monthly Mortgage Payment $497.76 2 522.65 3 548.78 576.22 5 605.03 6-30 635.28 Insurance $25.19 25.56 25.84 26.01 26.06 25.96