Question

You have been dreaming of owning a home, and are excited to have found a well-maintained 3 bedroom house on a lake for $338,000. You have been pre-approved for a 30-year fixed rate mortgage at 4.5% annual interest with a 20% down payment and $2,500 due at closing, but did not spend much time shopping around for a lender.

Your friend, who works for Waterstone Mortgage tells you two of their current options. The first option from Waterstone is a 30-year, 4.25% mortgage with a 15% down payment required, and $2,000 in closing costs. The second option from Waterstone is a 20-year, 4% mortgage with a 20% down payment required, and $1,5000 in closing costs.

Note that the yearly taxes on the property average $4,599, and annual homeowner’s insurance is $1,548. Assume you have budgeted $2,000 monthly for your adjusted monthly payment (PITI) and have saved $72,000 to cover your down payment and closing costs.

Determine which mortgage would be the best option and explain why you made your choice.

Part 2

Annual Interest Rate:

Length of Loan in years:

Down Payment Required %:

Closing Costs:

Down Payment Amount:

Total Due at Closing:

Monthly Payment (M) Principal & Interest:

Interest Paid:

Adjusted Monthly Payment (PITI):

Answer 1

Option 2 $338,000.00 $338,000.00 $338,000.00 Particulars Option 1 Option 3 S. No. A House Value Down Payment % C A*B/100 Down Payment 20.00 В 20.00 15.00 $67,600.00 $ 50,700.00 $67,600.00 $2,500.00 $ 2,000.00 $15,000.00 $267,900.00 $285,300.00 $255,400.00 $4,599.00 $ 4,599.00 $ 4,599.00 $272,499.00 $289,899.00 $259,999.00 Closing Cost D E-A-C-D Loan Amount ТAX F G-E+F Loan Amout Required н Tenure 30.00 30.00 20.00 ROI in % 4.25 4.50 4.00 $ 24,000.00 $ 24,000.00 $24,000.00 $ 1,548.00 $ 1,548.00 $1,548.00 $9,083.30 $ 9,63.30 12,999.95 $ 12,262.46 $ 12,320.71 $10,399.96 $ 22,893.76 $ 23,532.01$ 24,947.91 467.99$ Budgeted EMI K Insurance Principle M-G*1/100 Interest L N-K+L+M Actual EMI & Insurance Budget vs Actual outflow $ 1,106.25 $ P J-N (947.91)

In Option 1 & 2 only, Downpayments & Closing Cost are less than $72,000/-

In Option-1 ROI is Higher than Option-2, But due to Higher downpayment, Option-1's Annual Cash outflow is comparatively lesser than option-2.

Hence we can choose Option-1

Notes: Principle=Loan Amount Required/Loan Tenure