Question

1. You are considering the purchase of a $250,000 house using a regular fixed rate mortgage loan with a 20% down payment; what is the monthly payment (not including taxes and insurance) using a 30-year (5.0%), 20-year (4.50%), and a 15-year (4.00%)? How much total interest would you pay using the three different loans over the course of the loan? What are the reasons you would consider using a 5/1 adjustable rate mortgage? Would it be beneficial in today’s current interest rate environment to consider using an ARM?

Answer 1

Mortgage amount = 80%* 250,000 = $ 200,000

Next, calculate the monthly payment for the said options which has formula as per the below excel

= C3*C7*(1+C7)^C5 / ((1+C7)^C5-1)

So Monthly payments for

30 yr: $ 1074, interest paid is ( 200,000 - 12*1074*30 = $ 186,640)

20 yr: $ 1265 , interest paid is ( 200,000 - 12*1265*20 = $ 103,600)

15 yr: $ 1479, interest paid is ( 200,000 - 12*1479*15 = $ 66,220)

Next ,

The reason if we consider 1/5 mortgage payment is that we want to sell the house after 6/7 years. During that time we will have lower fixed payments for initial years and adjustable rate payments in next 2-3 years and it would not harm our pockets so much.

But if we have to consider longer term like 15-20 years then our mortgage can go up to 8% -9 % during adjustable years and that too for longer time.

Now say you have to consider lifetime cap rate, yearly cap rate. If yearly cap rate is 2% , then you end up paying 2% extra i.e. 6% on subsequent years.

Let me know if you have any queries regarding this, please comment and i will answer