Question

Please answer this question with as much detail as possible. Please CITE your sources.

Check the California Bay Area papers for the best mortgage rates and suggest what terms you should use to buy a $648,000 home (average in the Bay Area). State your sources and provide your calculations. Calculate the income necessary to qualify for the best loan. Find what a 3 bedroom, 2 bath house rents for in your area. Which is the better deal?

Answer 1

Please see below advantages for different maturities / type of loan:-

LOAN TYPE	INTEREST RATE	UNIQUE BENEFITS	MORTGAGE INSURANCE	BEST FOR
30-year fixed	Fixed rate for the life of a loan	Steady, predictable payments	PMI typically required if down payment is < 20%	Those who prefer a fixed rate and a lower monthly payment than a 15-year loan
15-year fixed	Fixed rate for the life of a loan	Lower interest rate & less interest paid than a 30-year loan	PMI typically required if down payment is < 20%	Those who want to pay off their loan faster & pay less interest
5/1 ARM	Fixed rate for 5 years, then may change every year thereafter	Lower interest rate for a set period of time	PMI typically required if down payment is < 20%	Those who will sell before 5 years, or are comfortable with payments that can change
7/1 ARM	Fixed rate for 7 years, then may change every year thereafter	Lower interest rate for a set period of time	PMI typically required if down payment is < 20%	Those who will sell before 7 years, or are comfortable with payments that can change
VA loan	Can be fixed or adjustable	$0 down (in most cases), no PMI, competitive interest rates	Not required; but a VA funding fee is required	Qualifying veterans or active service members
FHA loan	Can be fixed or adjustable	Down payments as little as 3.5% and less strict credit score requirements	Upfront and monthly MIP is required	Those with a lower credit score or down payment
Jumbo loan	Can be fixed or adjustable	Loan amounts that exceed the conforming loan limits	PMI requirements vary by lender	Those buying a home that exceeds $424,100 (or higher in some markets)

Please also find below the interest rate for different maturities / type of loan:-

Program	Rate
30-year fixed rate	4.39%
20-year fixed rate	4.13%
15-year fixed rate	3.82%
10-year fixed rate	3.71%
7/1 ARM	3.94%
5/1 ARM	3.86%
3/1 ARM	3.38%
Last updated 28/4/18

Now i have assumed that down payment is 20%, risk free rate is 2.5% & we are not going to sell the home after some years so i have calculated PMT for each fixed rate periods (monthly).

PMT = IP / (1-(1+R)^-N

Program	Rate	PMT (Monthly)	Years
30-year fixed rate	4.39%	$2,592.88	30
20-year fixed rate	4.13%	$3,177.03	20
15-year fixed rate	3.82%	$3,787.95	15
10-year fixed rate	3.71%	$5,177.40	10

Here P = (1-0.2) * 648000 = $518400 (As 20% downpayment has been done)

As per the 10 year fixed rate, per month borrower to pay $5177.4.

Income that is required to qualify this loan is calculated as below;-

Income	16179.35
Mortage Payment	$5,177.40
Taxes	4853.805
Insurance cost	323.587
Max housing expense	5824.566

Please note that this is monthly income.

In above table,,

Taxes are considered on an average 30% of income

Insurance cost is considered to be 2% of income

Maximum housing expense we considered to be 36% of income

So with the help of Solver tool in excel we can easily calculate minimum income required for this loan.

Thank You!!