Question

2) You want to buy a house for $400,000 with 10% down payment. You take two mortgages to over the $360,000 needed to buy the house. They are:

• Loan 1: Loan amount $160,000, fully amortizing 30-year fixed rate mortgage for 4.2%. This loan has 2 points and 1% pre-payment penalty.

• Loan 2: Loan amount $200,000, fully amortizing 15-year, 5-year ARM with reset every five years. Initial interest rate is 3.6%. Margin set at 2% over prime rate. Expected prime rates: 4% at end of year 5 and 7% at the end of year 10. There are no floors or caps of any kind on this loan. This loan has 3 points and 2% pre-payment penalty. Answer the following questions:

a) Loan 1 Mortgage payment for any month, payable end of corresponding month = $

b) Loan 2 Mortgage payment for month 61, payable end of 61st month = $

c) Loan 2 Mortgage payment for month 121, payable end of 121st month =

d) Loan 2 interest paid for the 70th month =

e) Actual Interest rate for 2 loans combined, assuming you keep the house for 10 years =

Answer 1

a) Loan 1 Mortgage payment for any month, payable end of corresponding month = $782.43

b) Loan 2 Mortgage payment for month 61, payable end of 61st month = $

This means after 5 years. Rate will be different. Interest Rate will be = 6%

Amount outstanding after 5 years will be = 144,895.26

Monthly payment will be = $1,608.63

c) Loan 2 Mortgage payment for month 121, payable end of 121st month =

Amount outstanding at the end of 10 years = 83,207.37

Interest rate will be = 9%

EMI= $1727.25

d) Loan 2 interest paid for the 70th month = $679.34

Outstanding amount at the end of 70th month = 135,868.58

Monthly Interest = 135,868.58 * 6%/12 = 679.34

e) Actual Interest rate for 2 loans combined, assuming you keep the house for 10 years =

Pre-payment penalty will be charged on both the loans.

Outstanding Amount Loan 1 = 42,277.71

Outstanding Amount Loan 2 = 83,207

Loan 1 pre-payment penalty = 1600

Loan 2 pre-payment penalty = 4000

Actual Interest rate = 3.98%