A family currently live in an apartment whose monthly rent is $950. They are thi

Question

A family currently live in an apartment whose monthly rent is $950. They are thinking of buying a house which would cost $220,000. They plan to live in this house for 5 years and sell it at the end of the 5th year. They would put a downpayment of $20,000 and finance the balance through a mortgage at 3.5% interest rate. The mortgage is to be repaid in 5 annual installments (which include both principal and interest) at the end of each year for the next 5 years The house will have the following additional expenses: annual maintenance: $1500; Property taxes:$5500; Insurance: $1200. Assume they are in tax bracket of 20% and the price of home, rent and expenditure increases by 2.5% per year. Their opportunity cost or required rate of return is 5% per year. Note that property taxes are tax deductible and there no tax payable on capital gains. Use annual compounding for amortization schedule of mortgage. Calculate the Post tax Mortgage Cost (principal repayment plus after tax interest cost) for year 3.

Explanation / Answer

Answer

Amortization Shedule for mortatage Year Pricipal amount Interest Total Payment Principal Paid 1 200000 7000 47000 40000 2 160000 5600 45600 40000 3 120000 4200 44200 40000 4 80000 2800 42800 40000 5 40000 1400 41400 40000 Calculation of post tax mortagage cost for year 3 Principal repayment in year 3= 40000 Add:- Interest on remaining Principal 4200 Less :- Interest tax sheild @ 20%(4200*20%) -840 Post tax mortatage cost for yr 3 is 43360

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