Question

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?  
                                                          

Answer 1

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