Question

An investor buys a condo for $160,000 by putting 10% down and financing the rest using the 15 year fixed rate in the WSJ. What are her monthly payments? Another investor decides to use an interest only loan to finance the same type of condo, the rate is 3.5% a year, what are the monthly payments? Three years later the condo is worth $170,000, what will be the return on the investment for each investor?

Answer 1

Solution:

Case1: When the investor pays 10% down and finances the rest.

down payment = 160,000 * 10% = 16000

15 years financing at the rate of 3.5%.

We will be using out BA II plus calculator in order to calculate the monthly payments.

PV = -16000 FV=160000 I/Y=3.5/12 (monthly) = .2916%, N = 15*12= 180 , PMT =??

After entering the respective values and pressing CPT + PMT we get the value of PMT as = 562.764

The monthly payments for this investor comes out to be 562.764

Return on Investment after three years

Total investment = 16000 + (562.764 * 12 * 3) = 16000 + 20259.504 = 36259.504

Total interest for three years = 5600 * 3 = 16800

Total principal retired = 20259.504 - 16800 = 3459.504

Loan Amount = 160000 - 16000 = 144000

Loan left after three years = 144000 - 3459.504 = 140540.496

Net gain = 170,000 - (loan left) = 170000 - 140540.496 = 29459.504

ROI = {(29459.504- 36259.504)/ 36259.504 }*100 = -.18753 * 100 = -18.753%

Case2: When an investor take an interest only loan

Amount to be funded = 160000

Interest rate = 3.5%

Period = 15 years

Yearly interest = 160000 * 3.5% = 5600

Monthly interest payments = 5600 / 12 = 466.67

The monthly payments for this investor comes out to be 466.67

Return on Investment after three years

Total investment = 466.67 * 12 * 3 = 16800.12

Principal after three years = 160000 (Since interest only loan)

Net Gain = 170000 - 160000 = 10000

ROI = (10000 - 16800.12)/16800.12 = -.4047 = -40.47%