Answered: Monthly Mortgage Insurance Year (n)…

Monthly Mortgage Insurance Year (n) Monthly Payment 1 $497.76 $25.19 $522.65 $25.56 3 $548.78 $25.84 4 $576.22 $26.01 5 $605.03 $26.06 6-30 $635.28 $25.96

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

Chapter9: Long-term Liabilities

Section: Chapter Questions

Problem 98PSA

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Question

Suppose you are going to buy a home worth $110,000, making a down payment in the amount of $50,000. The balance will be borrowed from the Capital Savings and Loan Bank. The loan officer offers the following two financing plans for the property:
Option l: A conventional fixed loan at an interest rate of 13% compounded
monthly over 30 years with 360 equal monthly payments.
Option 2: A graduated payment schedule (FHA 235 plan) at 11.5% interest
compounded monthly with the following monthly payment schedule:

For the FHA 235 plan, mortgage insurance is a must.
(a) Compute the monthly payment for Option 1.
(b) What is the effective annual interest rate you would pay under Option 2?
(c) Compute the outstanding balance for each option at the end of five years.
(d) Compute the total interest payment for each option.
(e) Assuming that your only investment alternative is a savings account that earns an interest rate of 6% compounded monthly, which option is a better deal?

Monthly Mortgage
Insurance
Year (n)
Monthly Payment
1
$497.76
$25.19
$522.65
$25.56
3
$548.78
$25.84
4
$576.22
$26.01
5
$605.03
$26.06
6-30
$635.28
$25.96

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