Question

In: Finance

You expect to live in a house you are planning to own for 5 years, with...

You expect to live in a house you are planning to own for 5 years, with a $300K loan. You could get a 3/1 ARM amortized over 15 years at 3.9 %. Suppose the expected interest rate of the ARM for years 4 and 5 is 4.5% adn 5.5% respectively. MARR is 10% per year compounded monthly. What is your Present Cost (PC) of this loan option?

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Expert Solution

Loan Amount $300,000
Initial interest rate 3.90%
Amortization period 15 Years
Monthly interest rate=(3.9/12)= 0.325%
Number of months=15*12 180
Monthly payment for first three years $2,204.06 (Using PMT function with Rate=0.325%,Nper=180, PV=-300000)
Future value of monthly payment at end of 36 months(three years) $84,029.75 (Using FVfunction with Rate=0.325%,Nper=36, Pmt=-2204.06))
Future value of Loan amount at end of 36 months $337,171.86 (Using FVfunction with Rate=0.325%,Nper=36, PV=-300000))
Amount of Loan Balance at end of 3 years $253,142.11 (337171.86-84029.75)
Interest rate at end of 3 years = 4.5%
Monthly interest rate=4.5/12= 0.3750%
Number of months of loan left=180-36= 144
Loan balance $253,142.11
Monthly payment for YEAR 4 $2,278.30 (Using PMT function with Rate=0.3750%,Nper=144, PV=-253142.11)
Future value of monthly payment at end of year4 $27,910.58 (Using FVfunction with Rate=0.3750%,Nper=12, Pmt=-2278.30))
Future value of Loan amount at end of year4 $264,771.41 (Using FVfunction with Rate=0.3750%,Nper=12, PV=-253142.11))
Amount of Loan Balance at end of 4years $236,860.83 (264771.41-27910.58)
Interest rate at end of 4 years = 5.50%
Monthly interest rate=5.5/12= 0.458333%
Number of months of loan left=144-12= 132
Loan balance $236,860.83
Monthly payment for YEAR 5 $2,395.59 (Using PMT function with Rate=0.458333%,Nper=132, PV=-236860.83)
Future value of monthly payment at end of year5 $29,482.98 (Using FVfunction with Rate=0.458333%,Nper=12, Pmt=-2395.59))
Future value of Loan amount at end of year5 $250,221.63 (Using FVfunction with Rate=0.458333%,Nper=12, PV=-236860.83))
Amount of Loan Balance at end of 5years $220,738.65 (250221.63-29482.98)
MARR=10%
Monthly discount Rate=(10/12)%=0.1/12= 0.008333333
Present Value (PV) of Cash Flow:
(Cash Flow)/((1+i)^N)
i=Discount Rate=0.008333333
N=Month of Cash Flow
N A B=A/(1.008333333^N)
MONTH Cash Flow PV of cash flow
1 $2,204.06 2185.844725
2 $2,204.06 2167.779893
3 $2,204.06 2149.864358
4 $2,204.06 2132.096884
5 $2,204.06 2114.47625
6 $2,204.06 2097.00124
7 $2,204.06 2079.670652
8 $2,204.06 2062.483292
9 $2,204.06 2045.437976
10 $2,204.06 2028.533531
11 $2,204.06 2011.768791
12 $2,204.06 1995.142604
13 $2,204.06 1978.653822
14 $2,204.06 1962.301312
15 $2,204.06 1946.083947
16 $2,204.06 1930.000609
17 $2,204.06 1914.050191
18 $2,204.06 1898.231595
19 $2,204.06 1882.543731
20 $2,204.06 1866.985519
21 $2,204.06 1851.555888
22 $2,204.06 1836.253773
23 $2,204.06 1821.078123
24 $2,204.06 1806.027891
25 $2,204.06 1791.102041
26 $2,204.06 1776.299546
27 $2,204.06 1761.619385
28 $2,204.06 1747.060548
29 $2,204.06 1732.622031
30 $2,204.06 1718.302841
31 $2,204.06 1704.101992
32 $2,204.06 1690.018505
33 $2,204.06 1676.051411
34 $2,204.06 1662.199747
35 $2,204.06 1648.462559
36 $2,204.06 1634.838902
37 $2,278.30 1675.939146
38 $2,278.30 1662.08841
39 $2,278.30 1648.352143
40 $2,278.30 1634.729398
41 $2,278.30 1621.219239
42 $2,278.30 1607.820733
43 $2,278.30 1594.532959
44 $2,278.30 1581.355001
45 $2,278.30 1568.285952
46 $2,278.30 1555.324912
47 $2,278.30 1542.470987
48 $2,278.30 1529.723294
49 $2,395.59 1595.185278
50 $2,395.59 1582.001929
51 $2,395.59 1568.927534
52 $2,395.59 1555.961191
53 $2,395.59 1543.102008
54 $2,395.59 1530.349099
55 $2,395.59 1517.701587
56 $2,395.59 1505.158599
57 $2,395.59 1492.719272
58 $2,395.59 1480.38275
59 $2,395.59 1468.148182
60 $2,395.59 1456.014726
SUM 105824.0404
PRESENT VALUE OF COST $105,824.04

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