Question

Aisling and Andrew are looking to purchase a doomsday bunker where they plan to live full time until a vaccine for Covid-19 is available. For the past six years they have been able to put $200 every month into a savings account with an APR of 0.95%. a. (20 pts) How much do Aisling and Andrew have saved toward a down payment? Aisling and Andrew qualify for a 30-year mortgage with a 4.65% APR or a 15-year mortgage with a 3.85% APR. They found a contractor that can install and equip a full amenity 1600 sq ft. bunker in their backyard for $330,000. Aisling and Andrew believe they can afford a monthly payment of $1,500 toward the purchase of this bunker. b. (20 pts) Assuming Aisling and Andrew will make payments for the entire life of the loan, how much would they pay in total for each loan option (including the down payment)? Andrew has been working with his Uncle Al over the past few years flipping investment properties in Flagstaff. This has been a very profitable endeavor for Al. As a thank you for all of Andrew’s hard work, Al decided to gift Aisling and Andrew $8,000 toward the purchase of the bunker. c. (20 pts) If Aisling and Andrew decide to put Uncle Al’s gift toward their down payment, how will this affect the total amount they would pay over the life of the loan for each loan option? It is right around the same time Uncle Al makes his offer that Aisling and Andrew’s loan officer informed them about mortgage points. Mortgage points, also referred to as discount points, are a way to pay in advance to reduce your interest rate. “Buying down the rate” by using mortgage points can lower your monthly mortgage payment and help you save interest over the life of the loan. In general, people can expect to lower the interest rate of their loan by 0.25% for every 1% of the loan amount they pay when closing on their bunker. For example, if a couple needed to borrow $250,000 to purchase a bunker and were offered a 5.25% APR, they could reduce their interest rate from a 5.15% APR to a 5% APR by purchasing one point for $2500 at their closing. d. (20 pts) Aisling suggests they use some of Uncle Al’s gift toward purchasing a point (or two) instead of using it all toward a down payment. If Aisling and Andrew decide to pay to reduce their interest rate, how will this affect the total amount they would pay over the life of the loan for each loan option (don’t forget to factor in the original down payment amount)? e. (20 pts) Calculating and stating any other quantities you believe are important, make and justify a recommendation for Aisling and Andrew regarding the purchase of this bunker. Address any features you believe are significant. For example, which options allow them to stay within their budget? Which loan offer from their bank should they pursue? Should they purchase mortgage points? Is this bunker a worthwhile expense?

Answer 1