Question

In: Finance

You are a homebuilder with excess houses in inventory and the local economy heading towards a...

You are a homebuilder with excess houses in inventory and the local economy heading towards a recession. In order to stimulate home sales, you offer the following promotion: 1.5% annual interest for the first 3 years of your new mortgage!

You have contracted with a local bank to offer 30-year, fully amortizing mortgages for your buyers at a rate of 3.95% per year with a .8 Loan-to-Value (LTV) ratio.

You have agreed to pay the bank the Present Value of the difference in monthly payments between their rate of 3.95%/year and your “teaser” rate of 1.5%/year.

Your promotion is working, and soon you have a home under contract to sell for $300,000. Using a Discount Rate of 5%/year, what is the amount which you willpay the bank at closing to compensate them for the 3-year teaser interest rate?

Use Excel. Use $$$ please

Expert Solution

With 1.5% annual interest, the monthly payment is calculated using PMT function in Excel as below :

rate = 1.5% / 12 (converting annual rate into monthly rate)

nper = 30 * 12 (30 year mortgage with 12 monthly payments each year)

pv = 300000 * 0.8 (loan amount = price of home * loan to value ratio)

PMT is calculated to be $828.29

With 3.95% annual interest, the monthly payment is calculated using PMT function in Excel as below :

rate = 3.95% / 12 (converting annual rate into monthly rate)

nper = 30 * 12 (30 year mortgage with 12 monthly payments each year)

pv = 300000 * 0.8 (loan amount = price of home * loan to value ratio)

PMT is calculated to be $1,138.39

The lower interest rate is applicable for 3 years, or 36 months. The present value of the difference in monthly payments is calculated by multiplying the difference in monthly payments with the present value factor.

Present value factor = 1 / (1 + (discount rate / 12))^month

Present value of differences in monthly payments is $10,363.42

jeff jeffy answered 3 months ago

A Space ship of mass 5000 kg is heading towards the moon and wants to change...

A Space ship of mass 5000 kg is heading towards the moon and wants to change its trajectory by 20 degrees relative to original path. The rocket has a velocity of 110 m/s. How much gas must be used up if it burns its rockets (using up fuel) and expels gas at a velocity of 1200 m/s (perpendicular to its direction of motion)? Please show and explain as much work as possible. Thank you!

The four major types of inventory are: excess inventory, WIP inventory, finished goods inventory, and MRO...

The four major types of inventory are: excess inventory, WIP inventory, finished goods inventory, and MRO inventory. A True B False

The local indigenous communities will be relocated from the area the houses are built upon. The...

The local indigenous communities will be relocated from the area the houses are built upon. The leaders of the communities object, but their combined contribution to the market economy (measured with GDP) is negligible. Using internet research discuss the weaknesses of GDP as a measure of welfare. Describe the three parts to Wight’s taxonomy of ethical action and apply it to the decision whether to go ahead with the project

Are we heading for a recession? Explain the conditions under which the global economy can be...

Are we heading for a recession? Explain the conditions under which the global economy can be classified as being in a recession as COVID-19 persists. Explain linking the pandemic to the various stages of a recession

Suppose that new data indicates that the global economy is slowing down, and we are heading...

Suppose that new data indicates that the global economy is slowing down, and we are heading for another global recession. As a result, there is pessimism among domestic consumers and investors affecting consumer and investment spending. (i) Show this development using Aggregate demand/Aggregate Supply (AD-AS) model of the domestic economy clearly. (Hint: Begin with the AD-AS diagram for the economy that shows the economy is in long-run equilibrium). Make sure to label the variables represented on the X-axis and Y-axis...

When the economy is heading into a recession, illustrate and explain using diagrams, how economic policy...

When the economy is heading into a recession, illustrate and explain using diagrams, how economic policy instruments can be used by the government and the central bank to prevent this from occurring?

An ambulance drives towards you as you are walking down the street. As it drives towards...

An ambulance drives towards you as you are walking down the street. As it drives towards you, you hear the sound of its siren at a frequency of 3255 Hz. After it passes, you hear the sound of its siren at a frequency of 2782 Hz as it is driving away. How fast was the ambulance driving? Recall that the speed of sound in air is v_sound = 767 mph.

What are the advantages & disadvantages of excess inventory? (250 words)

Excess inventory exists when a company inaccurately orders inventory and is left with more than the...

Excess inventory exists when a company inaccurately orders inventory and is left with more than the market demands or market demand dramatically falls after inventory is ordered. Having excess inventory is generally regarded as bad for business because of what it means for inventory turnover and the costs associated with managing it. Required: Discuss THREE (3) common justification to keep inventories low to ensure prudent working capital management.

Question 1 A local realtor wants to determine the average value for single-family houses in a...

Question 1 A local realtor wants to determine the average value for single-family houses in a community.A random sample of 50 houses is selected. The sample mean value is found to be $220,000 with a sample standard deviation of $40,000. a) Assuming that the values of all single-family houses in the community is normally distributed, compute a 90% confidence interval estimate for μ, where μ is the population mean value for all single-family houses in the community. b) Test the...