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## Finance questions: calculating amount qualified to borrow, monthly payment, total interest paid, cost different between adjustable-rate and fixed-rate loans and more...

Can someone please assist me with addressing these mortgage related questions?

(See attached file for full problem description)

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Using the following personal assumption

Monthly gross income $3,000

Money you have in savings for a down payment $25,000

Your monthly payments for all existing debts $400

Property tax rate in your area 1 percent

Hazard/home insurance rate in your area 0.5 percent

Borrower has an acceptable credit risk, with a respectable credit history

2. Assume that the bank offers the following mortgage terms and rates:

Term of loan 15 or 30 years

Down payment required 10 percent to 20 percent

Closing costs of Discount points of 1 percent

Origination fees 2 percent

Lender fees $300

Credit report cost $20

Escrow fee $300

Lender`s title insurance fee $400

Recording fee $25

Appraisal report $300

Survey fee $200

Termite infestation report $50

Interest rate for a 15-year fixed mortgage 6.5 percent

Interest rate for a 30-year fixed mortgage 7.0 percent

Interest rate for 15-year adjustable-rate mortgage (ARM) 5.0 percent, adjusted every 12 months

Payment-to-income (PTI) ratio range at your bank 28 percent to 33 percent

Then, using Internet mortgage calculators answer the following questions (Microsoft Word and Excel if possible):

1. How much do you qualify to borrow (assume 28% PTI) for a

a. 15-year fixed-rate mortgage (10% down)?

b. 30-year fixed-rate mortgage (10% down)?

c. 15-year fixed-rate mortgage (20% down)?

d. 30-year fixed-rate mortgage (20% down)?

2. How much do you qualify to borrow (assume 33% PTI) for a

a. 15-year fixed-rate mortgage (10% down)?

b. 30-year fixed-rate mortgage (10% down)?

c. 15-year fixed-rate mortgage (20% down)?

d. 30-year fixed-rate mortgage (20% down)?

3. Assuming closing costs are paid from savings, do the necessary calculations to answer the following questions:

a. What is the monthly payment on a 30-year, fixed-rate loan of $100,000?

b. What is the monthly payment on a 15-year, fixed-rate loan of $100,000?

c. What is the monthly payment on an adjustable-rate loan of $100,000 for the first year?

d. How much is the total interest paid on the 30-year loan in year 5?

e. How much is the total interest paid on the 15-year loan in year 5?

4. Given the following information on the adjustable-rate loan,

o maximum rate is 12%

o months before first adjustment is 36

o months between adjustments is 12

o rate change per adjustment is 2 percent

o years before sell/pay off loan is 7

o your savings rate is 4%

o your State 1 Federal Tax Rate is 40%

h. What is the cost difference between the adjustable-rate loan and the 30-year fixed rate loan if interest rates decrease?

i. What is the cost difference between the adjustable rate loan and the 30-year fixed-rate loan if interest rates increase?

j. Which loan would you prefer? Why?

3. In the same Microsoft Word document, answer the following questions:

? What is the effective annual interest rate of the 15-year mortgage in question 1, if the discount rate is zero?

? What is the effective annual interest rate of the 15-year mortgage in question 1, if the discount rate is 2 percent?

? Your bank suffers from the typical maturity mismatch in bank assets and liabilities.

o Could your bank make more adjustable-rate loans to reduce the mismatch problem?

o What is the likely consequence of the above on the profit margin of adjustable-rate loans versus fixed-rate loans?