John is offering a house for sale for $200,000 with an assumable loan which was made 5 years ago for $160,000 at 8.75 percent over 30 years. Mary is interested in buying the property. A bank can grant Mary a mortgage for $ 180,000 at the current market of 9.5 percent for 25 years. Assume they are all constant payment mortgages.

1. What is the current balance of John's loan?

2. What is the monthly payment if Mary chooses to get the new mortgage?

3. Which alternative is better for Mary ( solve this question by showing the APR)?

4. Assume Mary doesn't have enough money to pay the required down payment to assume John's mortgage loan. If she plans to assume John's current mortgage loan, she has to take out a second mortgage for $20,000 at 16% for 25 years to cover her shortage for the required down payment. Should she choose to get the new loan or to assume John's loan plus taking out the second mortgage (solve this question by showing the APR)?

Answer rating: 100% (QA)

1 The current balance of Johns loan can be calculated using the present value formula for an ordinary annuity Lets denote PV Present Value A Periodic ... View the full answer