1. (20 points) Assume you are are planning to purchase your first home for $250,

Question

1. (20 points) Assume you are are planning to purchase your first home for $250,000. You have a down payment of $50,000 and have found a loan with a 4.25% interest rate for a fixed rate, 30 year mortgage. 25% (a)(6 points) Draw a cash flow diagran for the first 5 months of this purchase 4. (b) (12 points) How much of the principal do you pay in the first 3 months of the loan? (c) (12 points) If you sell your home for $350,000 six years from the purchase date, what was your yearly rate of return on your investment?

Explanation / Answer

First let us calculate the monthly installment using the EMI function in excel. Hence, EMI =PMT(0.0425/12,360,-200000,,0) = $984 a.Cashflow diagram Months Loan o/s at beginning Int Total EMI Loan o/s at the end Principal repayment a b c = b * (4.25/12) % d= b+c e f = d - e g = e - c 0 Loan received 200000 1 200000 708.33 200708 984 199724 276 2 199724 707.36 200432 984 199448 277 3 199448 706.38 200154 984 199170 278 4 199170 705.39 199875 984 198891 279 5 198891 704.41 199596 984 198612 280 b. Refer column (g) of cashflow diagram c. Loan outstanding after 6 years i.e after 72 monthly installments = Present value of future 288 pending installments Using the excel function PV we get, i) Loan outstanding   =PV(0.0425/12,288,-984,,0) =       177,469 ii) Total amount paid upto 6 years = $984 * 72 =        70,848 Price paid for the house (i + ii)     248,317 Amount received on sale of house = $350,000 Profit on sale of house = 350000 - 248317 = $101,683 Yearly return   =( Sale Value / Total price ) ^ ( 1 / n) - 1 =(350000/248317)^(1/6) - 1 =5.89% Please hit the like button if the answer helped you else leave a comment for further clarification. Thank you! All the best!

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