Question

In Chapter 5 we studied "Amortized Loans" which are typically used for mortgages for home loans. Pick any city in the world and look up online what a typical home might cost. Use the amortized loan formula* with time of 30 years to come up with the monthly mortgage payment. Make sure to state what you assumed the interest rate and down payment were and why. Do you think the mortgage payment is reasonable? Is there another housing option that you think is better? Make sure to state the financial reasons and non-financial reasons for your choice. *Note that the amortized loan formula calculates principal and interest and does not include property taxes or home insurance, which could be another few hundred dollars a month.

Answer 1

Let's say I want to buy a house in the City of Mumbai, India The cost of living in the city is quite high, so a house would cost around INR 100,00,000 The interest rate on housing loan is around 9% Lets say the downpayment of the house is 10%, so it will be 10,00,000 The loan amount would be INR90,00,000 lets say the loan is for a period of 30 years So the monthly payment would be periodic monthly payment = Principal * Interest rates *(1+interest rate)^n /((1+interest rate)^n-1) here n is the number of periods Periodic monthly payment = 9000000*(0.09/12)*(1+0.09/12)^(30*12)/((1+0.09/12)^(30*12)-1) 72,416.04 The mortgage payment seems high but given the cost of the standard of living in the city, mortgagepayment is reasonable. The housing option cheaper would be to rent it but given the appreciation in the price of the property if I am willing to live there for some time and then sell it, it would better option to buy. Theprice of property has been rising significantly because of growing population and growing economy, so it does make sense to buy the house and live there for few years and sell it. And if interest rates fall in the coming time period, then get the loan refinanced.