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39) You are looking to purchase a property for 400,000. You have received two quotes. The...

39) You are looking to purchase a property for 400,000. You have received two quotes. The first quote is an 90% ltv 360-month amortization with a rate of 6%. The second offer comes from two sources. The first mortgage is 65% at 4.5% with 360-month amortization and the second mortgage takes the leverage to 90% at a rate of 12% with 360-month amortization. Which deal would you take?  
                                                          

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Expert Solution

ANSWER : OPTION 1 is better

As the monthly payments in Option 1 ($ $2,158.38) is less than the Total Monthly payments in option 2 ($ 2345.99).

Calculation of Monthly payments in both the proposals:

OPTION 1:

Particulars in formula Values Calculation
Purchase price 400000
Loan Amount PV 360000 =400000*90%
Number of Periods NPER 360
Annual Rate 6%
Rate Per period RATE 0.005 =Annual Rate/12
Monthly Payments PMT $2,158.38
Formulae used "=PMT(0.005,360,360000)"
"=PMT(RATE,NPER,PV)"

MONTHLY PAYMENTS IN OPTION 1 = $2158.38

OPTION 2

First mortgage

Particulars in formula Values Calculation
Purchase price 400000
Loan Amount PV 260000 =400000*65%
Number of Periods NPER 360
Annual Rate 5%
Rate Per period RATE 0.00375 =Annual Rate/12
Monthly Payments PMT $1,317.38
Formulae used "=-PMT(0.00375,360,260000)"
"=-PMT(RATE,NPER,PV)"
Second mortgage:
Particulars in formula Values Calculation
Purchase price 400000
Loan Amount PV 100000 =400000*25%
Number of Periods NPER 360
Annual Rate 12%
Rate Per period RATE 0.01 =Annual Rate/12
Monthly Payments PMT $1,028.61
Formulae used "=-PMT(0.01,360,100000)"
"=-PMT(RATE,NPER,PV)"

TOTAL MONTHLY PAYMENTS UNDER OPTION 2 = $1,317.38 + $1,028.61 = $ 2345.99

jeff jeffy answered 2 years ago
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