Question

Queenie just bought a house that cost $1,600,000. She has saved up $200,000 for the closing costs--such as legal fees—and the down payment. When she approaches the local bank, she was quoted the rate for a two-year mortgage at 4% (APR, semi-annual compounding), 25 years amortization. But there is one problem; she was told that her income satisfied the bank’s GDS and TDS requirements, but the bank can lend only up to 75% of the purchase price of the house or the appraised value, whichever is lower. The appraised value of the house is $1,400,000. The estimated closing costs (legal fees etc.) are $20,000.

1. What is the maximum amount that the bank will lend her?
2. What is the monthly payment to the bank?
3. How much money does she need to close the purchase?
4. To close the purchase, she plans to get a second mortgage from a private lender. The rate for a two-year term second mortgage is quoted at 10% (APR) with semi-annual compounding, and amortization period of 20 years. What is the monthly payment?
5. What is the outstanding balance after two years on the private mortgage?

Answer 1

Question a

The maximum amount bank can lend is 75% of 1,600,000 or 1,400,000 which ever is less

i.e $ 1,050,000

Question b

The monthly Payment to the bank is $ 5569

Question C

The amount required for Queenie is

i. Down Payment = 1,600,000 - 1,050,000 = 550,000

ii. Legal expense = $ 20,000

Total amount = $ 570,000