Jacob Is Fixing Up A House And Asking For $124,500, He Feels Confident That The
ID: 2788112 • Letter: J
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Jacob Is Fixing Up A House And Asking For $124,500, He Feels Confident That The Work Can Be ... Your question has been answered Let us know if you got a helpful answer. Rate this answer Question: Jacob is fixing up a house and asking for $124,500, he feels confident that the work can be compl... Jacob is fixing up a house and asking for $124,500, he feels confident that the work can be completed for $12,000. With that number included he decided the total cost of the house would be $140,000 or less.
1.) By putting 20% down on the house, Jacob can get a 30-year fixed-rate mortgage for 4.25% Based on a purchase price of $140,000, compute the down payment, and the principal and interest payment for the loan.
2.)Jacob finds a lender that will offer him 100% financing using an adjustable rate mortgage based on a 30-year amortization, with a 3-year interest lock at 5.0%. Compute the monthly payment for principal and interest on the loan for the first 3 years.
3.)After 3 years the economy has boomed, inflation has increased and the new adjusted interest rate is 10%. Compute the new monthly payment for principal and interest on the loan.
4.)Briefly discussed the pro and cons of adjustable rate mortgages. Are there circumstances when you think it is a good idea to chose an adjustable rate mortage?
5.)assume that the interest rate stays at 10% for the remaining 27 years, calculate the total interest that will be paid over the entire 30-year life of the adjustable rate mortgage. State any conclusions that you can draw about adjustable rate mortgages.
Explanation / Answer
1.) House Value =$140,000
Down Payment =$0.20 x 140,000 =$28,000
Loan Principal =$112,000
Time = 30 years
Rate of Interest =4.25% or 0.3542% monthly
Monthly Loan Installment =PMT(0.003542, 360, 112000) =$551
Total Interest Payable in 30 year term =$86,350
2.) Loan Principal =$140,000
Time = 30 years
Interest Lock-In Period = 3 years
Interest Rate = 5% or 0.4167% monthly
Monthly Payment for initial 3 years =PMT(0.004167, 360, 140000) =$751.55
3.) Loan Outstanding after 3 years =$133,481
Remaining Time = 27 years
New Interest Rate = 10% or 0.8333% monthly
New Monthly Installment =PMT(0.00833, 324, 133481) =$1,195.24
4.) ARM is adjustable rate mortgage in which the interest rate varies during the loan period.
The main advantage of ARM is that the inital installments may be lower which gives borrower comfort of adjusting his or her finances. But the main disadvantage is that the payments at later stages may rise too high in case the interest rates rises (subject to interest rate cap) and maynot fall too early also leading to higher outflow each month. ARMs are beneficial when the prevailing interest rates in the market are already high and there is good probability that the interest rates will fall in the coming months. The falling interest rates will result in lower cash outflow each month and thus saving against a fixed rate loan.
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