Question

Use the following to answer questions 1-4.

You currently live (rent free) in your parents' basement but it's a bit awkward when you bring dates home. Your friends are looking for a new roommate and have asked if you're interested in moving in. Your share of the rent (which includes all utilities) will be $800 per month, due at the beginning of the month, and you will be signing a two-year lease.

You parents think you should save your money so you can buy a house when you graduate in two years. If you stay living in your parents' basement, and deposit the money you save by not having to pay rent into a savings account at the beginning of each month, your parents have offered to give you a gift equal to the amount you have saved towards a down payment on your first home. Assume the bank is offering a 5% annual interest rate, compounding monthly, on new savings accounts

1. Your monthly rent payment in this example would be considered _________________.

A. an ordinary annuity

B. an annuity due

C. amortization

D. a perpetuity

2. If you take your parents up on their offer, how much will have (in total) for a down payment on a home when you graduate? Round your final answer to the nearest whole dollar. * Hint: remember your parents have offered to match what you save on your own

A. $3,444

B. $20,465

C. $40,297

D. $40,465

3. Suppose you took your parents up on their offer and are now getting ready to graduate. You have decided that you can afford a house payment of $1,000 per month. You received quotes from several lenders and determined that the most likely annual interest rate you will be offered is 4.25% for a 30 year, fixed rate mortgage. What is the maximum you can pay for a house?  Hints: (1) Mortgage payments are in arrears (meaning they are paid at the END of the time period). Be sure your calculator is in the correct mode before solving. (2) After you solve for the maximum loan amount, don't forget to add on your down payment to determine the sales price!

A. $203,277

B. $223,509

C. $243,742

D. $249,927

4. Would you be required to pay PMI with this loan?

A. Yes

B. No

Use the following to answer questions 5-7.

You have selected the lender you will be using and completed the application process. You are excited to find out that your credit score was better than you originally thought when estimating how much you could spend on a house. You are being offered a lower interest rate than you were originally quoted on two different loan options. Both are 30 year, fixed rate mortgages with payments of $1,000 per month and origination fees equal to 2% of the loan amount. * hints (1) Assume these loans have zero PMI (2) you have additional money set aside to cover closing costs so you are using the full amount from #3 as a down payment.

• Loan A has an APR of 4% with no points.
• Loan B has an APR of 3.90% with 1.5 points.

5. What is your Effective borrowing cost if you select Loan A? Enter your answer as a whole number with 3 decimal points

6. What is your Effective borrowing cost if you select Loan B? Enter your answer as a whole number with 3 decimal points

7. Assuming you intend to stay in the house for 30 years, which loan should you choose?

Answer the remaining questions in this assignment assuming you selected Loan A.

8. You decide to rent out a room in your new home to your best friend for $500 per month. If you add the extra money to your monthly house payment, how many years will it take you to pay off your mortgage?

A. 12 years

B. 15.69 years

C. 30 years

D. 188 years

Please answer all parts of the question!

Answer 1

1. Option B is connect. Sunce the payments are made at the beginning of each month A is incorrect as in the case of an ordinary annuity payments are made all the end of each period. C- amortization is used in case of a borrowing where a lumpsum is repaid by a combination of principal and interest. Hence this option is incorrect. D - A perpetuity is a stream of cash flows that goes on forever. Here the lease is for 2 years hence it is not a perpetuity.