If you haven%u2019t bought the home in previous questions yet, consider this cas

Question

If you haven%u2019t bought the home in previous questions yet, consider this case. (Even if you bought, you still need to solve this question!)

You are about to purchase your first home for personal use. The price of the house is $400K. The property taxes and casualty insurance are estimated at $200 and $100 per month respectively; these two costs are each month in your escrow. You are estimating $3,500 in closing fees and expect to get a 15 year fixed rate mortgage for a fixed 4.9% with 2 points. Assume taxes and insurance remain constant for the duration of the loan. Your PMI payment is $200/month and will be needed as long as LTV is more than or equal to 80%. The appraised value of the house is expected to rise at 2% each year (end of year). You are in a 30% tax bracket. All tax credits in a given year will be received at the end of the year. You have two options:

1) You put down $40,000 on the home (plus any points and closing fees) and take out a 360K mortgage.

2) You put down $40,000 on the home (plus any points and closing fees), borrow another $40,000 from your uncle Vini and pay this back at 10% annual effective interest rate with 4 payments on 02/30/2010, 02/30/2011, 02/30/2012, 02/30/2013 (the interest portion of 40K loan from uncle Vini is non-tax deductable). You get a 320K mortgage.

You take out the mortgage and buy the house on March 1 2009. The first payment of the mortgage is due at the beginning of April 2009. You will sell the property on April 1st 2024 (15 years later) at appraised value. MARR is 10% per year compounded monthly. What is the present cost of these transactions at March 1st 2009 under each option (attach spreadsheet):

Option 1________________

Option 2________________

Should you borrow from the uncle?____________

Explanation / Answer

Definition of 'Mortgage' A debt instrument that is secured by the collateral of specified real estate property and that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses to make large purchases of real estate without paying the entire value of the purchase up front. Mortgages are also known as "liens against property" or "claims on property." In a residential mortgage, a home buyer pledges his or her house to the bank. The bank has a claim on the house should the home buyer default on paying the mortgage. In the case of a foreclosure, the bank may evict the home's tenants and sell the house, using the income from the sale to clear the mortgage debt.

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