Question

Mary Svevo decides to move to move to Montauk, NY after she quits her job in Lacuna, Inc. She also determines to purchase a single- family home there. The total acquisition price of the house is $1,295,000, and 90% of it would be financed with a 30- year FRM. The mortgage payments are made at the end of each month before maturity. The interest rate on the mortgage loan is 8.40%. Also, the lender requires her to obtain private mortgage insurance to protect aganist the losses due to default.

1. Determine the size of down payment Ans: $164,465

2. Determine the crossover point of this mortgage loan Ans. Around the 262th payment

3. Suppose Mary defaults after the 25th payment and the house is thus sold for $1,100,000 to compensate the lender's losses. Given the private mortgage insurance protects the lender for losses up to 35% of the loan, determine the net loss of the lender and the insurance company.  Ans: $0, $45,884

PLEASE SHOW ME HOW TO GET TO THE BOLDED ANSWERS

Answer 1

1. Ideally the size of downpayment must be 10% of the total acquisition value of the house. Since lender requires the party to obtain insurance for the property hence this includes 10% of 1295000/- ie 129500 along with insurance cost.

2. Every EMI is summation of payement towards principal and interest. In the beginning of a loan the payments towards interest component is greater. CROSSOVER point is a point where the payment towards principal is greater than interest. AMORTIZATION SCHEDULE can be generated fr this purpose.

260:22	01/01/2040	8,879.22	4,489.88	4,389.34	637,021.65
261:22	02/01/2040	8,879.22	4,459.15	4,420.07	632,601.58
262:22	03/01/2040	8,879.22	4,428.21	4,451.01	628,150.57
263:22	04/01/2040	8,879.22	4,397.05	4,482.17	623,668.40

from the above schedule it is clear that 262 EMI is the CROSSOVER POINT.

3.After the 25th payment the loan amount balance outstanding is 1145884

the house is sold at 1100000 hence the net loss to insurance irm and the leander would be 45884 you can use excel spreadsheet for calulation of same. OR you can use the formula:

emi

$8,879.22

$852.06

$8,027.15

$202,364.55

bal outstanding $1,145,884.10