Question

Joe Smith, a young Engineer has planned to buy a house that they could afford. He and his

spouse have been saving even before getting married and have put away about $65,000.

The average price of a start up house or condo is about $550,000 here in Los Angeles, California.

They have the following options to take a Jumbo loan;

1.     ) 30-years fixed (% 20 down)

·       Note rate: 3.75 %

·       Cost: 0.0 Points

2.     ) 15-years fixed (% 20 down)

·       Note rate: 3.75%

·       Cost: 0.0 Points

·      

3.     ) 5-years ARM Interest only (zero down)

·       Note rate: 3.5% (first 5-years), then variable

·       Cost: 1.25 Points

·    a.) Total cost of loan

· b.) Total interest to be paid

· c.) The APR (including the cost of loan).

·    d.) The monthly payments.

Answer 1

Tables below give the values.

First case: Total cost of loan - $733,575

b.) Total interest to be paid - $293,575

· c.) The APR (including the cost of loan) – 3.5%

·    d.) The monthly payments - $ 2,038

	Loan Amount	Monthly Interest rate	Loan period	EMI
	440,000	0.003125	360	$2,038
Month	Balance month beginning	EMI	Interest	Principal repaid	Month end balance
1	440,000	$2,038	1,375	$663	439,337
2	439,337	$2,038	1,373	$665	438,673
--	--	--	--	--	--
359	4,056	$2,038	13	$2,025	2,031
360	2,031	$2,038	6	$2,031	0
	TOTAL	$733,575	$293,575	$440,000

Second case : Total cost of loan - $575,960                                           

b.) Total interest to be paid - $135,960

c.) The APR (including the cost of loan) – 3.5%

d.) The monthly payments - $ 3,200

	Loan Amount	Monthly Interest rate	Loan period	EMI
	440,000	0.003125	180	$3,200
Month	Balance month beginning	EMI	Interest	Principal repaid	Month end balance
1	440,000	$3,200	1,375	$1,825	438,175
2	438,175	$3,200	1,369	$1,830	436,345
--	--	--	--	--	-
179	6,370	$3,200	20	$3,180	3,190
180	3,190	$3,200	10	$3,190	0
	TOTAL	$575,960	$135,960	$440,000

Third case : Since variable rate after 5 years in not available, total values cannot be determined.

Total cost of loan - $96,250 (first 5 years)                              

b.) Total interest to be paid - $96,250 (first 5 years)

c.) The APR (including the cost of loan) – 3.5% + 0.21% toward initial cost = 3.71%

d.) The monthly payments - $10,005 (first 5 years)

	Loan Amount	Monthly Interest rate	Loan period	EMI
	550,000	0.002917	60	$10,005
Month	Balance month beginning	EMI	Interest	Principal repaid	Month end balance
1	550,000	$1,604	1604	$0	550,000
2	550,000	$1,604	1,604	$0	550,000
--
59	550,000	$1,604	1,604	$0	550,000
60	550,000	$1,604	1,604	$0	550,000
		$96,250	$96,250	$0