Fin 331 Homework Assignment 1 Due Nov. 5, 2015 Consider the listing at 5966 Estelle City San Diego, CA 92115 Price $449,000 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 $100,000. 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 an 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 4.00% for 80% of the purchase price. Prepaid finance charges will be $1,500 plus 1 point on the loan. 2. Loan B - Fixed 30 year loan at 4.375% for 80% of the purchase price. Prepaid finance charges will be $0 plus 0.00 points on the loan. Higher rate, lower closing costs. 3. Loan C - Fixed 30 year loan at 4.125% 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, plus $1,500 plus 1.00 point on the loan. 4. Loan D - Intermediate adjustable rate mortgage that has a fixed interest rate for the first 5 years at 3.250% for 80% of the purchase price. Prepaid finance charges are 1% 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 4.25% 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: It may be convenient for you to complete the following table: 80% LTV Higher Rate Loan A B C D Down Payment Loan Amount Monthly Principal & Interest Monthly Mortgage Insurance Payment Property Taxes/month Insurance/Month Total House Payment Loan Payment used to qualify to ARM House Payment used to qualify for ARM Hous ing Ratio Total Debt to Income Ratio APR for the Loan Not Required Do they qualify for this loan? Down Payment Closing Costs Prepaid Finance Charges Total Cas h to Close Description 80% LTV Lower Rate 90% LTV Fixed 30 80% LTV 5-Year ARM Name: Analysis of Your Calculations Calculate the difference in the cash required to close and the total monthly payment for the 30 year loan with the higher rate and the 90% loan with mortgage insurance. Additional Cash to Close [Loan B Less Lo ...

1. Fin 331
Homework Assignment 1
Due Nov. 5, 2015
Consider the listing at 5966 Estelle
City San Diego, CA 92115
Price $449,000
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 $100,000. 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.

2. You are to evaluate 4 financing scenarios for them. You must
determine if they qualify for each of them.
They can get an 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 4.00% for 80% of the
purchase price. Prepaid finance charges
will be $1,500 plus 1 point on the loan.
2. Loan B - Fixed 30 year loan at 4.375% for 80% of the
purchase price. Prepaid finance charges
will be $0 plus 0.00 points on the loan. Higher rate, lower
closing costs.
3. Loan C - Fixed 30 year loan at 4.125% 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, plus $1,500 plus 1.00 point on the loan.
4. Loan D - Intermediate adjustable rate mortgage that has a
fixed interest rate for the first 5 years
at 3.250% for 80% of the purchase price. Prepaid finance
charges are 1% 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
4.25% 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.

3. Name:
It may be convenient for you to complete the following table:
80% LTV
Higher Rate
Loan A B C D
Down Payment
Loan Amount
Monthly Principal &
Interest
Monthly Mortgage
Insurance Payment
Property
Taxes/month
Insurance/Month
Total House
Payment
Loan Payment used
to qualify to ARM

4. House Payment
used to qualify for
ARM
Hous ing Ratio
Total Debt to
Income Ratio
APR for the Loan Not Required
Do they qualify for
this loan?
Down Payment
Closing Costs
Prepaid Finance
Charges
Total Cas h to Close
Description
80% LTV
Lower Rate
90% LTV Fixed 30
80% LTV
5-Year ARM

5. Name:
Analysis of Your Calculations
Calculate the difference in the cash required to close and the
total monthly payment for the 30 year loan
with the higher rate and the 90% loan with mortgage insurance.
Additional Cash to Close [Loan B Less Loan C] Additional
Monthly Pmt [Loan B Less Loan C]
$ $
Should these buyers take the 90% loan and use the reduced cash
to close to pay off their student loans?
Explain you recommendation.
Consider the ARM loan.
o What is the balance after 5 years? $
o What is the maximum possible principal and interest payment
on that loan in year 6, when the
rate adjusts? $
Which Loan option would you recommend? Loan
Why do you suggest this option?

6. Yes No