Fin 331 Homework Assignment

Consider the listing at 4815 Catoctin San Diego, CA 92115

Price $475,000

Bob & Betty Homebuyers want to make an offer on this property at the list

price. Bob earns $48,000 per year and Betty earns $54,000 per year. They

have very good credit. Their monthly payments are $200 for student loans,

$350 for their car payment and minimum credit card payment of $50. They

have savings of $125,000. The balance of their student loans is $40,000.

Insurance on this house will cost them $900 per year. Property taxes are

calculated at 1.25% of the purchase price per year. Monthly mortgage

insurance is required if the down payment is less than 20%.

In addition to prepaid finance charges, they will have other closing costs of

$3,000.

You are to evaluate 4 financing scenarios for them. You must determine if

they qualify for each of them. They can get loan approval if their housing

ratio is less than 32% and their total debt to income ratio is less than 43%.

1. Loan A – Fixed 30 year loan at 3.25% for 80% of the purchase price.

Prepaid finance charges will be $1,500 plus 1.60 points on the loan.

2. Loan B – Fixed 30 year loan at 3.625% for 80% of the purchase price.

Prepaid finance charges will be $0 plus 0.00 points on the loan. Higher

rate, no closing costs.

3. Loan C – Fixed 30 year loan at 3.50% for 90% of the purchase price.

Mortgage insurance will cost 0.44% of the loan amount per year.

Prepaid finance charges will include the mortgage insurance (included

in calculation of APR), plus $1,500 plus 0.25 points on the loan.

4. Loan D – Intermediate adjustable rate mortgage that has a

fixed interest rate for the first 5 years at 2.875% for 80% of the

purchase price. Prepaid finance charges include 1 point of the

loan amount plus $1,500. This loan has an initial interest rate

change cap of 5%, subsequent change caps of 2%/year and a

life cap of 5%. The lender will use an interest rate of 3.50% to

calculate the loan payment to determine their debt to income

ratio since there may be payment shock when the rate changes

after 5 years. Name:

Use the Excel Workbook provided with this assignment to complete your

analysis. 20% of your grade will be determined by the use of Excel to

complete your analysis with formulas in your Excel workbook. You can

enter the calculated values manually, but your score will be reduced to a

total of 8 out of 10 points IF all of your answers are correct.

Submit you assignment with your Excel Spreadsheet. Name your file “HW2 –

Last Name, First Name” Which loan would you recommend and why?

What is the highest possible payment on the ARM (Loan D) when the interest

rate adjusts at the end of 5 years?

Loan C – This option for the Homebuyers is to put down 10%. They could use

their remaining savings to pay off their student loans. If they pay off their

student loans, they will no longer have the monthly payment on their student

loans. For this option, assume that they pay off their student loans and will

qualify without the payment on their student loans. This will reduce their

total debt to income ratio. Should they do that? Why?

Fin 331 Homework Assignment

Consider the listing at 4815 Catoctin San Diego, CA 92115

Price $475,000

Bob & Betty Homebuyers want to make an offer on this property at the list

price. Bob earns $48,000 per year and Betty earns $54,000 per year. They

have very good credit. Their monthly payments are $200 for student loans,

$350 for their car payment and minimum credit card payment of $50. They

have savings of $125,000. The balance of their student loans is $40,000.

Insurance on this house will cost them $900 per year. Property taxes are

calculated at 1.25% of the purchase price per year. Monthly mortgage

insurance is required if the down payment is less than 20%.

In addition to prepaid finance charges, they will have other closing costs of

$3,000.

You are to evaluate 4 financing scenarios for them. You must determine if

they qualify for each of them. They can get loan approval if their housing

ratio is less than 32% and their total debt to income ratio is less than 43%.

1. Loan A – Fixed 30 year loan at 3.25% for 80% of the purchase price.

Prepaid finance charges will be $1,500 plus 1.60 points on the loan.

2. Loan B – Fixed 30 year loan at 3.625% for 80% of the purchase price.

Prepaid finance charges will be $0 plus 0.00 points on the loan. Higher

rate, no closing costs.

3. Loan C – Fixed 30 year loan at 3.50% for 90% of the purchase price.

Mortgage insurance will cost 0.44% of the loan amount per year.

Prepaid finance charges will include the mortgage insurance (included

in calculation of APR), plus $1,500 plus 0.25 points on the loan.

4. Loan D – Intermediate adjustable rate mortgage that has a

fixed interest rate for the first 5 years at 2.875% for 80% of the

purchase price. Prepaid finance charges include 1 point of the

loan amount plus $1,500. This loan has an initial interest rate

change cap of 5%, subsequent change caps of 2%/year and a

life cap of 5%. The lender will use an interest rate of 3.50% to

calculate the loan payment to determine their debt to income

ratio since there may be payment shock when the rate changes

after 5 years. Name:

Use the Excel Workbook provided with this assignment to complete your

analysis. 20% of your grade will be determined by the use of Excel to

complete your analysis with formulas in your Excel workbook. You can

enter the calculated values manually, but your score will be reduced to a

total of 8 out of 10 points IF all of your answers are correct.

Submit you assignment with your Excel Spreadsheet. Name your file “HW2 –

Last Name, First Name” Which loan would you recommend and why?

What is the highest possible payment on the ARM (Loan D) when the interest

rate adjusts at the end of 5 years?

Loan C – This option for the Homebuyers is to put down 10%. They could use

their remaining savings to pay off their student loans. If they pay off their

student loans, they will no longer have the monthly payment on their student

loans. For this option, assume that they pay off their student loans and will

qualify without the payment on their student loans. This will reduce their

total debt to income ratio. Should they do that? Why?

Fin 331 Homework Assignment

Consider the listing at 4815 Catoctin San Diego, CA 92115

Price $475,000

Bob & Betty Homebuyers want to make an offer on this property at the list

price. Bob earns $48,000 per year and Betty earns $54,000 per year. They

have very good credit. Their monthly payments are $200 for student loans,

$350 for their car payment and minimum credit card payment of $50. They

have savings of $125,000. The balance of their student loans is $40,000.

Insurance on this house will cost them $900 per year. Property taxes are

calculated at 1.25% of the purchase price per year. Monthly mortgage

insurance is required if the down payment is less than 20%.

In addition to prepaid finance charges, they will have other closing costs of

$3,000.

You are to evaluate 4 financing scenarios for them. You must determine if

they qualify for each of them. They can get loan approval if their housing

ratio is less than 32% and their total debt to income ratio is less than 43%.

1. Loan A – Fixed 30 year loan at 3.25% for 80% of the purchase price.

Prepaid finance charges will be $1,500 plus 1.60 points on the loan.

2. Loan B – Fixed 30 year loan at 3.625% for 80% of the purchase price.

Prepaid finance charges will be $0 plus 0.00 points on the loan. Higher

rate, no closing costs.

3. Loan C – Fixed 30 year loan at 3.50% for 90% of the purchase price.

Mortgage insurance will cost 0.44% of the loan amount per year.

Prepaid finance charges will include the mortgage insurance (included

in calculation of APR), plus $1,500 plus 0.25 points on the loan.

4. Loan D – Intermediate adjustable rate mortgage that has a

fixed interest rate for the first 5 years at 2.875% for 80% of the

purchase price. Prepaid finance charges include 1 point of the

loan amount plus $1,500. This loan has an initial interest rate

change cap of 5%, subsequent change caps of 2%/year and a

life cap of 5%. The lender will use an interest rate of 3.50% to

calculate the loan payment to determine their debt to income

ratio since there may be payment shock when the rate changes

after 5 years. Name:

Use the Excel Workbook provided with this assignment to complete your

analysis. 20% of your grade will be determined by the use of Excel to

complete your analysis with formulas in your Excel workbook. You can

enter the calculated values manually, but your score will be reduced to a

total of 8 out of 10 points IF all of your answers are correct.

Submit you assignment with your Excel Spreadsheet. Name your file “HW2 –

Last Name, First Name” Which loan would you recommend and why?

What is the highest possible payment on the ARM (Loan D) when the interest

rate adjusts at the end of 5 years?

Loan C – This option for the Homebuyers is to put down 10%. They could use

their remaining savings to pay off their student loans. If they pay off their

student loans, they will no longer have the monthly payment on their student

loans. For this option, assume that they pay off their student loans and will

qualify without the payment on their student loans. This will reduce their

total debt to income ratio. Should they do that? Why?

Consider the listing at 4815 Catoctin San Diego, CA 92115

Price $475,000

Bob & Betty Homebuyers want to make an offer on this property at the list

price. Bob earns $48,000 per year and Betty earns $54,000 per year. They

have very good credit. Their monthly payments are $200 for student loans,

$350 for their car payment and minimum credit card payment of $50. They

have savings of $125,000. The balance of their student loans is $40,000.

Insurance on this house will cost them $900 per year. Property taxes are

calculated at 1.25% of the purchase price per year. Monthly mortgage

insurance is required if the down payment is less than 20%.

In addition to prepaid finance charges, they will have other closing costs of

$3,000.

You are to evaluate 4 financing scenarios for them. You must determine if

they qualify for each of them. They can get loan approval if their housing

ratio is less than 32% and their total debt to income ratio is less than 43%.

1. Loan A – Fixed 30 year loan at 3.25% for 80% of the purchase price.

Prepaid finance charges will be $1,500 plus 1.60 points on the loan.

2. Loan B – Fixed 30 year loan at 3.625% for 80% of the purchase price.

Prepaid finance charges will be $0 plus 0.00 points on the loan. Higher

rate, no closing costs.

3. Loan C – Fixed 30 year loan at 3.50% for 90% of the purchase price.

Mortgage insurance will cost 0.44% of the loan amount per year.

Prepaid finance charges will include the mortgage insurance (included

in calculation of APR), plus $1,500 plus 0.25 points on the loan.

4. Loan D – Intermediate adjustable rate mortgage that has a

fixed interest rate for the first 5 years at 2.875% for 80% of the

purchase price. Prepaid finance charges include 1 point of the

loan amount plus $1,500. This loan has an initial interest rate

change cap of 5%, subsequent change caps of 2%/year and a

life cap of 5%. The lender will use an interest rate of 3.50% to

calculate the loan payment to determine their debt to income

ratio since there may be payment shock when the rate changes

after 5 years. Name:

Use the Excel Workbook provided with this assignment to complete your

analysis. 20% of your grade will be determined by the use of Excel to

complete your analysis with formulas in your Excel workbook. You can

enter the calculated values manually, but your score will be reduced to a

total of 8 out of 10 points IF all of your answers are correct.

Submit you assignment with your Excel Spreadsheet. Name your file “HW2 –

Last Name, First Name” Which loan would you recommend and why?

What is the highest possible payment on the ARM (Loan D) when the interest

rate adjusts at the end of 5 years?

Loan C – This option for the Homebuyers is to put down 10%. They could use

their remaining savings to pay off their student loans. If they pay off their

student loans, they will no longer have the monthly payment on their student

loans. For this option, assume that they pay off their student loans and will

qualify without the payment on their student loans. This will reduce their

total debt to income ratio. Should they do that? Why?

Consider the listing at 4815 Catoctin San Diego, CA 92115

Price $475,000

Bob & Betty Homebuyers want to make an offer on this property at the list

price. Bob earns $48,000 per year and Betty earns $54,000 per year. They

have very good credit. Their monthly payments are $200 for student loans,

$350 for their car payment and minimum credit card payment of $50. They

have savings of $125,000. The balance of their student loans is $40,000.

Insurance on this house will cost them $900 per year. Property taxes are

calculated at 1.25% of the purchase price per year. Monthly mortgage

insurance is required if the down payment is less than 20%.

In addition to prepaid finance charges, they will have other closing costs of

$3,000.

You are to evaluate 4 financing scenarios for them. You must determine if

they qualify for each of them. They can get loan approval if their housing

ratio is less than 32% and their total debt to income ratio is less than 43%.

1. Loan A – Fixed 30 year loan at 3.25% for 80% of the purchase price.

Prepaid finance charges will be $1,500 plus 1.60 points on the loan.

2. Loan B – Fixed 30 year loan at 3.625% for 80% of the purchase price.

Prepaid finance charges will be $0 plus 0.00 points on the loan. Higher

rate, no closing costs.

3. Loan C – Fixed 30 year loan at 3.50% for 90% of the purchase price.

Mortgage insurance will cost 0.44% of the loan amount per year.

Prepaid finance charges will include the mortgage insurance (included

in calculation of APR), plus $1,500 plus 0.25 points on the loan.

4. Loan D – Intermediate adjustable rate mortgage that has a

fixed interest rate for the first 5 years at 2.875% for 80% of the

purchase price. Prepaid finance charges include 1 point of the

loan amount plus $1,500. This loan has an initial interest rate

change cap of 5%, subsequent change caps of 2%/year and a

life cap of 5%. The lender will use an interest rate of 3.50% to

calculate the loan payment to determine their debt to income

ratio since there may be payment shock when the rate changes

after 5 years. Name:

Use the Excel Workbook provided with this assignment to complete your

analysis. 20% of your grade will be determined by the use of Excel to

complete your analysis with formulas in your Excel workbook. You can

enter the calculated values manually, but your score will be reduced to a

total of 8 out of 10 points IF all of your answers are correct.

Submit you assignment with your Excel Spreadsheet. Name your file “HW2 –

Last Name, First Name” Which loan would you recommend and why?

What is the highest possible payment on the ARM (Loan D) when the interest

rate adjusts at the end of 5 years?

Loan C – This option for the Homebuyers is to put down 10%. They could use

their remaining savings to pay off their student loans. If they pay off their

student loans, they will no longer have the monthly payment on their student

loans. For this option, assume that they pay off their student loans and will

qualify without the payment on their student loans. This will reduce their

total debt to income ratio. Should they do that? Why?