Question

Joe Exotic is looking to spend some of his royalties from Tiger King on a new home, and he has found one he can retire to in peace. The home is valued at $575,000 and a mortgage lender is offering a 30-year, fixed rate mortgage with 5.5% annual interest with a down payment of 10%. Property tax for the home is $4,880 per year and homeowner’s insurance is $250 per year, while PMI is $220 per month if required. Additional closing costs total $1,000.

(a) Determine the monthly mortgage payments for this mortgage.

(b) How much will Joe need to come up with in total closing costs in order to purchase this home?

(c) If Joe expects to earn $168,000 per year for the foreseeable future, and has no other outstanding debts, will he qualify for this mortgage? Be sure to justify your answer with clear work below.

(d) Fast forward a few years and Joe still owes $115,000 on his mortgage. To raise some money for some projects around the house, he decides to take out a home equity loan. The bank offers him a second mortgage with maximum LTV 30%. How much can Joe borrow with this new loan?

Answer 1

Cost of house= $575,000

Down payment= 10%. Therefore, mortgage= $575,000*(1-10%)= $517,500

Part (a):

Monthly payments= $2,938.31 as follows:

Part (b):

Closing costs are as follows:

First year property tax: $4,880

First year home owners insurance: $250

First month PMI: $220

Additional closing costs: $1,000

Total closing costs= Total of above= $6,350

Part (c):

GDSR is ascertained at 25.61% as follows:

Usually, lenders permit GDSR up to 28%. It is stated that there are no other debts. Hence TDSR also will be 25.61% which is normally allowed up to 36%.

Hence Joe qualifies for the loan.

Part (d):

It is assumed that value remains unchanged at $575,000. For considering second loan, LTV allowed is 30%.

Therefore, total loan allowed= Cost*(1-LTV)= $575,000*0.70 = $402,500

Out of this, first loan outstanding (given)= $115,000

New loan than can be borrowed= $402,500-$115,000 = $287,500