Frank made some inquiries and found a lender that has pre-approved him for a $12

Question

Frank made some inquiries and found a lender that has pre-approved him for a $125,000, 30-year mortgage @ 5% interest, with 10 percent down. Frank has also learned that if he puts 20% down, the mortgage company will not charge him the customary 1.5% PMI Insurance Fees on the loan amount. Frank has been to a real estate agent, and he has seen a few places in his price range. Frank wants to calculate which purchase is better for him. He wants to make a decision soon.

Two Housing Options

As Frank’s financial advisor, help Frank ‘run the numbers’ and advise him on the best course of action: a) purchase, b) do not purchase, or c) make a plan to save the money necessary to cover the down payment and closing costs on a house in 5 years.

Option One: A condominium in a nearby town, listed for $120,000.00, is 10 miles closer to his job, and is located in a nice neighborhood on a secondary street. Current property taxes on this condominium are $2,800 per year, the Property Owners Association (POA) fee is $250.00 per month, and the insurance agent estimates his homeowner’s insurance policy for the condominium will be $500.00 per year.

Option Two: A one-story ranch house on the other side of the local lake. The house has three bedrooms & two baths. It was built 20 years ago, and it is in need of some cosmetic repairs; Frank knows very little about home repairs. The house is rustic, offers the relaxed atmosphere he likes, and has a nice yard; great for entertaining. The house is available at $150,000.00. Current property taxes on the home are $3,800 per year, and the homeowner’s insurance policy is estimated at $700 per year.

Explanation / Answer

For loan of 125000 at 5%;30 year mortgage the yearly payment will come to 8132.

The best course of action is to own a home,as if frank donot purchase a home he will have to pay rental expenses.

If frank purchases a home he will have an real asset and price of real estates are on a constant rise whereas rental payments are neither investments neither savings they do not give any return ,so instead giving rental payments giving mortgage installments are way better.

Of the 2 options option A is better as its within the budget of pre approved loan and not as old as option 2 which is 20 years old.

Also the total cost per year will be 8132 + 2800 + 3000+ 500 = 14,432,this includes all the costs including loan installments.

For second option the cost is 4500 + 9757 = 14258,it willhave high maintainance which is not mentioned as its old .So option 1 is better.9757 is mortgage installment

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