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ANSWER LETTERS A,B,C,D

CASE 1 The Johnsons Decide to Buy a Home Belinda Johnson's parents and maternal grandmother have combined their finances and presented Harry and Belinda with $50,000 cash gift to use to purchase a home. The Johnsons have shopped and found a house in a new housing development that they like very much. They could either borrow from the developer or obtain a loan from one of three other mortgage lenders. The financial alternatives and data for the home are summa- rized in the table below. (d) Assuming that the Johnsons will need about $3,000 for moving costs in addition to closing costs), which financing option would you recommend? Why? Financing Details on a Home Available to the Johnsons Price: $290,000. Developer A will finance the purchase with a 10 percent down payment and a 30-year, 5 per- cent ARM loan with 2 interest points. The initial monthly payment for principal and interest is $1401.10 ($261,000 loan after the down payment is made; 261 x $5.3682). After one year, the rate rises to 5.5 percent, with a princi- pal plus interest payment of $1481.94. At that point, the rate can go up or down as much as 2 percent per year, de- pending on the cost of an index of mortgage funds. There is an interest-rate cap of 5 percent over the life of the loan. Taxes are estimated to be about $3,800, and the home- owner's insurance premium should be about $1,800 an- nually. A mortgage insurance premium of $88 per month must be paid monthly on the two 10 percent down op- tions. Figure out the best option for them, and tell why. (a) Which plan has the lowest total up-front costs? The highest? (b) What would be the full monthly payment for PITI and PMI for each of the options? (c) If the Johnsons had enough additional cash to make the 20 percent down payment, would you recom- mend lender 1 or lender 2? Why? Lender 3 Loan term and type Interest rate Down payment Loan amount Points Principal and interest payment PMI Home: Price, $290,000; Taxes, $2,800; Insurance, $1,700 Developer A Lender 1 Lender 2 30-year ARM* 30-year Cont 15-year Con 5.0% 5.5% 6% $29,000 $58,000 $58,000 261,000 232,000 232,000 20-year Rent 5.5% $29,000 261,000 1,401 88 1,317 1,957 1,795 88 CASE 1 The Johnsons Decide to Buy a Home Belinda Johnson's parents and maternal grandmother have combined their finances and presented Harry and Belinda with $50,000 cash gift to use to purchase a home. The Johnsons have shopped and found a house in a new housing development that they like very much. They could either borrow from the developer or obtain a loan from one of three other mortgage lenders. The financial alternatives and data for the home are summa- rized in the table below. (d) Assuming that the Johnsons will need about $3,000 for moving costs in addition to closing costs), which financing option would you recommend? Why? Financing Details on a Home Available to the Johnsons Price: $290,000. Developer A will finance the purchase with a 10 percent down payment and a 30-year, 5 per- cent ARM loan with 2 interest points. The initial monthly payment for principal and interest is $1401.10 ($261,000 loan after the down payment is made; 261 x $5.3682). After one year, the rate rises to 5.5 percent, with a princi- pal plus interest payment of $1481.94. At that point, the rate can go up or down as much as 2 percent per year, de- pending on the cost of an index of mortgage funds. There is an interest-rate cap of 5 percent over the life of the loan. Taxes are estimated to be about $3,800, and the home- owner's insurance premium should be about $1,800 an- nually. A mortgage insurance premium of $88 per month must be paid monthly on the two 10 percent down op- tions. Figure out the best option for them, and tell why. (a) Which plan has the lowest total up-front costs? The highest? (b) What would be the full monthly payment for PITI and PMI for each of the options? (c) If the Johnsons had enough additional cash to make the 20 percent down payment, would you recom- mend lender 1 or lender 2? Why? Lender 3 Loan term and type Interest rate Down payment Loan amount Points Principal and interest payment PMI Home: Price, $290,000; Taxes, $2,800; Insurance, $1,700 Developer A Lender 1 Lender 2 30-year ARM* 30-year Cont 15-year Con 5.0% 5.5% 6% $29,000 $58,000 $58,000 261,000 232,000 232,000 20-year Rent 5.5% $29,000 261,000 1,401 88 1,317 1,957 1,795 88