Question

1. You want to purchase a house that is priced at $300,000. You can get a loan for 80 percent of the bank's appraised value at 5.25% for 30 years with monthly amortization. The bank's appraiser has a theory that the value of a house is 95% of the asking price and appraises it accordingly. What will be your monthly payment if you take the loan?

2.Set up an amortization schedule for years 1 through 5 for Problem 1 showing annual mortgage payment amounts, yearly mortgage balances, principal, and interest for each year (total). (Do not do a monthly amortization schedule to answer this problem, but do assume monthly compounding. Hint: Multiply the monthly payment in Problem 1 times 12 to get total annual payments)

Answer 1

(1) House Price = $ 300000, Appraised Value = 95% of the Asking Price = 0.95 x 300000 = $ 285000

Mortgage Value = 80% of Appraised Value = 0.8 x 285000 = $ 228000

Interest Rate = 5.25% and Mortgage Tenure = 30 years or (30 x 12) = 360 months

Applicable Monthly Rate = 5.25 / 12 = 0.4375 %

Let the monthly repayments be $ m

Therefore, 228000 = m x (1/0.004375) x [1-{1/(1.004375)^(360)}]

228000 = m x 181.09

m = 228000 / 181.09 = $ 1259.02

(2) Monthly Mortgage Payments = $ 1259.02

Annual Mortgage Payments = 12 x 1259.02 = $ 15108.29