Question

Instruction: Discuss and answer the required questions in the following case study, then reply to at least two of your classmates' discussions with substantial content by Sunday midnight. The Tremblays have been preapproved by their bank to enter the housing market with a mortgage interest rate of 8.6%. They have $30,000 set aside for a down payment. They have also calculated that they can afford a monthly payment of $1,350. They have narrowed their search to three houses and are hoping that financial constraints will narrow their choices. The three houses will cost the following amounts: $150,000, $270,000, and $400,000. The bank will add $50 to each mortgage payment if they put less than 20% down and an additional fee of $50 more to each payment if they put less than 10% down.

a. Which of these houses can they afford with a 30-year mortgage?

b. Which of these houses can they afford with a 15-year mortgage?

c. Which house do you think they should buy?

Answer 1

a) They can afford only 1 house costing $150000

b) They can afford only 1 house costing $150000 because the present value of the payments exceeds the cost of the house.

c) They should buy the first house costing $150000