Question

You are buying a condo on the beach in Galveston, TX. Here are the details.

Overview:

condo 893 sqft

2 beds $286/sqft

2 baths 673

Built in 2006

131 days on Trulia

Description:

New washer/dryer, fresh paint in living and kitchen in October. This condo is one of the best on Seawall. enjoy the beautiful interior with its relaxed atmosphere. You'll be drawn to the balcony where you will enjoy the amazing biew of the ocean and enjoy the sounds of seagulls. This condo has a modern and full equipped kitchen, stainless steel appliances, granite counter tops, travertine floors throughout. The elegant master bedroom with an amazing view of the ocean. Full furniture conveys with the sale. Ready for you to move in or rent out.

SELLING PRICE:   $224,000

Welcome to your virtual bank. For this assessment, assume the mortgage amount is the sale price of the house you chose. Based on your credit score, you are offered a fixed rate, an adjustable rate, and a balloon mortgage. Each is described below. For each mortgage option, submit the following to your instructor:

• Fill in each table. (2 pts for each answer in table)

• Calculate the total cost of principal and interest for each option. (2 pts each)

• Conclude with the option you would choose and why. (4 pts)

OPTION 1:

Fixed Rate Mortgage: 5% for 30 years

Year	Monthly Payment	# of Payments
1-30		360

TOTAL COST (PRINCIPAL + INTEREST): ­­­­­­­­­­­­_______________________

    OPTION 2:

Adjustable Rate Mortgage: 4% with terms 5/1 with a 2/6 cap for 30 years (Assume the interest rate increases by 1% after the initial period and every 10 years thereafter.)
Year	Monthly Payment	# of Payments	Total Cost for Each Period
1-5		60
6-15		120
16-25		120
26-30		60

TOTAL COST (PRINCIPAL + INTEREST):___________________________

   OPTION 3:

Balloon Mortgage: 4% fixed interest rate with terms 30/7
Year	Monthly Payment	# of Payments	Total Cost for Each Period
1-7		84
Balloon Payment		1

TOTAL COST (PRINCIPAL + INTEREST):__________________________

Which option would you choose and why?

Answer 1

OPTION 1:

Fixed Rate Mortgage: 5% for 30 years

Year	Monthly Payment	# of Payments
1-30	$1,202.48	360

Total Cost (Principal + interest) = $1,202.48 * 360 = $432,893

Total Interest = $432,893 - $224,000 = $208,893

OPTION 2:

Adjustable Rate Mortgage: 4% with terms 5/1 with a 2/6 cap for 30 years (Assume the interest rate increases by 1% after the initial period and every 10 years thereafter.)
Year	Monthly Payment	# of Payments	Total Cost for Each Period
1-5	$1,069.41	60	=1069.41 * 60 = $64,164.62
6-15	$1,184.39	120	=1184.39 * 120 = $142,127.24
16-25	$1,263.87	120	=1263.87 * 120 = $151,664.14
26-30	$1,263.87	60	=1263.87 * 60 = $75,832.07
Total Cost			$433,788

OPTION 3:

Balloon Mortgage: 4% fixed interest rate with terms 30/7
Year	Monthly Payment	# of Payments	Total Cost for Each Period
1-7	$1,069.41	84	=1069.41 * 84 = $89,830
Balloon Payment	$192,773.21	1	=192773.21 * 1 = $192,773.21
Total Cost			$282,604

Since total cost is least in Option 3 which is Balloon payment option with a total cost of $282,604, this option should be chosen.