Question

In: Finance

a. Denny and Janice (and their dog Chewy) have just purchased a house and are calculating...

a. Denny and Janice (and their dog Chewy) have just purchased a house and are calculating how much money they will need when the closing day rolls around. The purchase price is $200,000. They will make a 20% down payment, and they must pay 2 points on the loan. Closing costs should be 3% of the purchase price. What is the total dollar amount they will need at closing? (Show all work.)

b. Benny and Sally want to calculate the difference in monthly payments on a $110,000 home as a result of a $5,000 down payment or a $10,000 down payment. Use your financial calculator to figure the monthly payments, assuming they get a 6.5%, 30-year mortgage.

c. If a lender requires that mortgage payments cannot exceed 30% of gross income and total loan payments cannot exceed 38% of gross income, calculate the monthly payment for which a person with the following financial data could qualify.

Gross Income $5,500
Stereo loan payment 250
Furniture loan payment 200
Auto loan 400

Solutions

Expert Solution

a. Down payment = 200,000 * 20%

= $40,000

Loan amount = purchase price - down payment

= 200,000 - 40,000

= $160,000

Points = 160,000 * 2%

= $3,200

closing cost = 200,000 * 3%

= $6,000

Total needed = 40,000 + 3,200 + 6,000

= $49,200 Ans.

b. When down payment is $5,000:

Loan amount = 110,000 - 5,000 = $105,000

Monthly payment = [P * i * (1 + i)n] / [(1 + i)n - 1]

where P = loan amount = $105,000

i = 6.5% = 6.5 / 1200 = 0.0054

n = 30 years = 30 * 12 = 360 months

Monthly payment = [105,000 * 0.0054 * (1 + 0.0054)360] / [(1 + 0.0054)360 - 1]

= [105,000 * 0.0054 * 6.9502] / [6.9502 - 1]

= 3,940.7634 / 5.9502 = $662.29   

When down payment is $10,000:

Loan amount = 110,000 - 10,000 = $100,000

Monthly payment = [P * i * (1 + i)n] / [(1 + i)n - 1]

where P = loan amount = $100,000

i = 6.5% = 6.5 / 1200 = 0.0054

n = 30 years = 30 * 12 = 360 months

Monthly payment = [100,000 * 0.0054 * (1 + 0.0054)360] / [(1 + 0.0054)360 - 1]

= [100,000 * 0.0054 * 6.9502] / [6.9502 - 1]

= 3,753.108 / 5.9502 = $630.75

Difference in monthly payment = $662.29 - $630.75 = $31.54 Ans.

c. Maximum mortage payment a person can take = 30% of gross income

= 5,500 * 30% = $1,650

Maximum eligibility of loan amount = (38% of gross income) - other loan amount

= (5,500 * 38%) - 250 -200 - 400 = $1,240

Qualifying amount of loan = $1,240 Ans.


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