Question

You hope to be able to purchase a home within 1-3 years after graduation. You expect to have to save for the necessary down payment and closing costs without relying on financial help from your family or relatives. Your financial goal is to purchase a home in the $300,000 price range and have the available cash for the down payment and required closing costs for the type of mortgage financing that you select and are able to receive home mortgage loan approval.

Based upon what you should have learned this semester in this class, what type of home mortgage financing do you believe is going to be the right one for your first home purchase? Briefly explain why.

Using an FHA mortgage loan with LTV or 95% (down pmt of 5%) Closing costs of 3% plus 1.5% for FHA loan. Interest rate is 5.75% plus an additional .7% for FHA loan

ASSUME THAT THE REAL ESTATE HOME MORTGAGE FINANCING CONDITIONS ARE APPROXIMATELY THE SAME AS TODAY1

Type of home mortgage Financing? ____________

Required Down Payment? $ ____________

Expected Closing Costs? $ _____________

Total amount of your expected required Down payment and closing costs?

$_______________

Amount of your new mortgage loan? $_____________ Do not add your closing costs to your mortgage loan amount. Closing costs are paid at the closing!

Do you want a 15 year of a 30 year term mortgage? ___________

Expected annual interest rate for your home mortgage? ____________%

What is your monthly mortgage payment based upon your information above?

$_____________

What is your payment plus 1/12 annual property taxes $_______ and insurance $ ______

Estimate the insurance and property taxes based upon the geographic area where you plan to live. BE SPECIFIC and REALIST Based in Atlanta, GA property tax rate is 1.027%

Total Monthly Mortgage Payment including Taxes and Insurance = $______________

How much annual income must you earn in order to qualify for the type of home financing that you have selected?

Annual Income Needed $________________

Monthly Income Needed $ _______________

What is the Annual Percentage Rate for your home mortgage loan   __________%

Your Home as an Investment

How much total cash outflow will you need to purchase your home $   ______________

If the home that you purchase appreciates in value by 4% per year, what will be the current market value of your home in 7 years?

$ ________________

What will be your outstanding mortgage loan balance after 7 years?

$ _________________

What will be you total home equity value in your home after 7 years?

$_____________

What will be your annual rate of return on your investment in homeownership at the end of 7

years? _____________%

Answer 1

Based on the given data and assuptions required as per FHA rules on the Credit Score and other eligibility Norms, pls find below the workings on optons of either Mortgage under FHA or under 95% Criteria:

The lines in bold represent answers for the queries raised:

Other Assumptions:

- No other debts / liability during the tenure of this Mortgage;

- Credit Score eligibility norms are satisfied;

- Property appreciation of 4% is considered compounded way - Year-on-Year; Have not considered any discounting factor on this as the comparison of outstanding Mortgage amount and Property value have been asked to assess as at end of Year 7.

- Tenure of the Loan opted for 15 years

Based on these calculations, it is preferred to go with the Loan with 5% downpayment.

	FHA	Loan
Price of Property	3,00,000	3,00,000
Down Payment	3.50%	5%
Closing Costs	4.50%	3.00%
Interest Rate	6.45%	5.75%
Type	FHA	Loan
Down Payment	10,500	15,000
Closing Costs	13,500	9,000
Total - Down Payment + Closing Costs	24,000	24,000
Amount of Loan	2,89,500	2,85,000
Tenure (in years)	15	15
Annual Interest Rate	6.45%	5.75%
Expected Monthly Mortgage Payment	2,560	2,400
Property Taxes (1/12th)	257	257
Insurance @ 0.5% on Mortgage amount	121	119
Total Monthly Payments	2,937	2,776
Front End Ratio	29%	28%
Debt - to - Income Ratio	41%	36%
Minimum Monthly Income Needed	10,129	9,913
Minimum Monthly Income Needed	7,164	7,710
Based on the above,
Monthly Income needed	10,129	9,913
Annual Income Needed	1,21,547	1,18,950
Total Cash Outflow for Purchase
Total - Down Payment + Closing Costs	24,000	24,000
Monthly Payments * 15 Years	5,28,728	4,99,590
Total Cash Outflow	5,52,728	5,23,590
Value after 7 Years with 4% growth YoY - (a)	3,94,780	3,94,780
Approx Principal Outstanding at Year 7 - (b)	1,88,000	1,81,000
Home Equity Value (a) - (b)	2,06,780	2,13,780
Total Investment till Year 7
Monthly Payments * 7 Years	2,46,740	2,33,142
Down Payment	10,500	15,000
Total Investment till Year 7 (c)	2,57,240	2,48,142
Annual	36,749	35,449
Value after 7 Years with 4% growth YoY - (a)	3,94,780	3,94,780
Annual	56,397	56,397
Net Total Return (d) = (a) - (c)	1,37,540	1,46,638
Annual	19,649	20,948
Annual Rate of Return on Home Ownership	53.5%	59.1%