Real estate finance assignment

Fin 331 Homework Assignment 1

Due Nov. 5, 2015

Consider the listing at 5966 Estelle

City San Diego, CA 92115 Price $449,000

Bob & Betty Homebuyers want to make an offer on this property at the list price. Bob earns $48,000 per year and Betty earns $54,000 per year. They have very good credit. Their monthly payments are $200 for student loans, $350 for their car payment and minimum credit card payment of $50. They have savings of $100,000. The balance of their student loans is $40,000. Insurance on this house will cost them $900 per year. Property taxes are calculated at 1.25% of the purchase price per year. Monthly mortgage insurance is required if the down payment is less than 20%.

In addition to prepaid finance charges, they will have other closing costs of $3,000. You are to evaluate 4 financing scenarios for them. You must determine if they qualify for each of them. They can get an approval if their housing ratio is less than 32% and their total debt to income ratio is less than 43%.

1. Loan A – Fixed 30 year loan at 4.00% for 80% of the purchase price. Prepaid finance charges will be $1,500 plus 1 point on the loan.

2. Loan B - Fixed 30 year loan at 4.375% for 80% of the purchase price. Prepaid finance charges will be $0 plus 0.00 points on the loan. Higher rate, lower closing costs.

3. Loan C - Fixed 30 year loan at 4.125% for 90% of the purchase price. Mortgage insurance will cost 0.44% of the loan amount per year. Prepaid finance charges will include the mortgage insurance, plus $1,500 plus 1.00 point on the loan.

4. Loan D - Intermediate adjustable rate mortgage that has a fixed interest rate for the first 5 years at 3.250% for 80% of the purchase price. Prepaid finance charges are 1% of the loan amount plus $1,500. This loan has an initial interest rate change cap of 5%, subsequent change caps of 2%/year and a life cap of 5%. The lender will use an interest rate of 4.25% to calculate the loan payment to determine their debt to income ratio since there may be payment shock when the rate changes after 5 years.

Name: It may be convenient for you to complete the following table:

80% LTV Higher Rate

Loan A B C D

Down Payment

Loan Amount

Monthly Principal & Interest

Monthly Mortgage Insurance Payment

Property Taxes/month

Insurance/Month

Total House Payment

Loan Payment used to qualify to ARM

House Payment used to qualify for

ARM

Hous ing Ratio

Total Debt to Income Ratio

APR for the Loan Not Required

Do they qualify for this loan?

Down Payment

Closing Costs

Prepaid Finance Charges

Total Cas h to Close

Description 80% LTV

Lower Rate 90% LTV Fixed 30

80% LTV 5-Year ARM

Name:

Analysis of Your Calculations

Calculate the difference in the cash required to close and the total monthly payment for the 30 year loan with the higher rate and the 90% loan with mortgage insurance. Additional Cash to Close [Loan B Less Loan C] Additional Monthly Pmt [Loan B Less Loan C] $ $

Should these buyers take the 90% loan and use the reduced cash to close to pay off their student loans? Explain you recommendation.

Consider the ARM loan.

o What is the balance after 5 years? $

o What is the maximum possible principal and interest payment on that loan in year 6, when the rate adjusts? $

Which Loan option would you recommend? Loan

Why do you suggest this option?

Yes No