You are working for a bank that is issuing 30-year mortgages. To meet your cost of capital, you need to price these mortgages using an interest rate (stated as aneffective annual rate) of 20%.

Question 1) What is the most you can lend to a borrower who can only afford to pay $1,250per month? (The first payment is made one period after the mortgage is issued, the standard assumption.)

Your director wants to create a loan program where borrowers can defer making their first monthly payment for 2 years. The borrower will still make monthly payments over 30 total years, but the first payment will be made 2-years (aka 24-months) after the loan is issued. (The last payment made 32 years after the loan is issued.) Interestwillaccrue during the first 2 years.

Assume borrower in part 1 can afford 2,350 per month and the maximum loan amount under the conditions of part 1 is 180,755. (Note that this is not necessarily the same answer aspart 1.)

Question 2) What is the maximum loan size under this new scheme?

Answer rating: 100% (QA)

To calculate the maximum loan size for the borrower who can afford 1250 per month we can use the for... View the full answer