Dr. Bhattacharya and Dr. Malinowski are considering purchasing a house together after spending 2 years as professors at UB. They
have identified a 4 bedroom, single family home in the Elmwood Village that will cost $473,000 to purchase. This home is also an investment as they only plan to live in the house for 10 years. After that time the couple anticipates selling the house for $680,000 (net revenue after all other expenses). As their smart engineering friend who has taken Engineering Economy, they have asked for your help in selecting the best mortgage option for their needs.
Option A: A special 15 year fixed rate mortgage, with bi-weekly payments (i.e. every 2 weeks or 26 payments per year). The loan's interest rate is 3.94% compounded monthly. Because of the short term (i.e. length) of this loan the bank will only require a 25% down payment. The couple would owe an additional $3,200 in closing costs and fees, however the lender will allow them to include the closing costs and fees in the loan finance amount (i.e. the amount borrowed).
Option B: Conventional 30-year mortgage with an interest rate of 4.375% APR with monthly payments, and if they choose this option they would need to make only a 20% down payment and would owe an additional $5250 in closing costs and fees. They will make the down payment from their savings (i.e. pay it in cash), but the closing costs and fees, can once again be included in the loan finance amount.
a. [1 points] Determine the monthly payments that they will make for each loan in the first ten years of ownership for both the financing options.
b. [2 points) Drs. Bhattacharya and Malinowski would like to choose the option that will maximize their total profit (i.e. minimize the total amount of interest they will paid over the ten years they own the home) at the time of sale. Which of the two lending options should they choose?
Option A: A special 15 year fixed rate mortgage, with bi-weekly payments (i.e. every 2 weeks or 26 payments per year). The loan's interest rate is 3.94% compounded monthly. Because of the short term (i.e. length) of this loan the bank will only require a 25% down payment. The couple would owe an additional $3,200 in closing costs and fees, however the lender will allow them to include the closing costs and fees in the loan finance amount (i.e. the amount borrowed).
Option B: Conventional 30-year mortgage with an interest rate of 4.375% APR with monthly payments, and if they choose this option they would need to make only a 20% down payment and would owe an additional $5250 in closing costs and fees. They will make the down payment from their savings (i.e. pay it in cash), but the closing costs and fees, can once again be included in the loan finance amount.
a. [1 points] Determine the monthly payments that they will make for each loan in the first ten years of ownership for both the financing options.
b. [2 points) Drs. Bhattacharya and Malinowski would like to choose the option that will maximize their total profit (i.e. minimize the total amount of interest they will paid over the ten years they own the home) at the time of sale. Which of the two lending options should they choose?
1 answer:
Answer:
Explanation:
Home Value 473000
Down payment 118250
Debt 354750
Fees 3200
Total Mortgage value (Debt + Fee) 357950
Rate 3.94%
Period per anum 26
Excel formula Bi weekly payment
=PMT(3.94%/26,26 x 15,-357950,0,0) $ 1,216.27
Payment in first 10 years 1216.27 x 10 x 26 = 316,230.2
Home Value 473000
Down payment 94600
Debt 378400
Fees 5250
Total Mortgage value (Debt + Fee) 383650
Rate 4.38%
Period per annum 12
Excel formula Monthly payment
=PMT(4.375%/12,12 x 30,-383650,0,0) $ 1,915.51
Payment in first 10 years 1915.51 x 10 x 12 = $229,861.2
The attached files shows the detailed analysis.
From the attached files and the analysis, it is evident that the couple would like to choose first option with bi weekly payments to maximize their profit and interest paid as this is lesser and more preferable than the second option.
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