Adjustable Rate Mortgage

Tom and Nancy want to buy a house in a particular neighborhood. they have two children ages 1 and 4. The average price home in this neighborhood runs about $350,000.  Together their family income is $100,000.  They have saved $75,000. The home they want to purchase costs $300,000. Taxes on the home run $3.00 per $100 of assessed value of the home. For new homes the assessed value is equal to 75% of the purchase price. Insurance runs half of one percent of the purchase price of the home. An Adjustable Rate Mortgage (ARM) requires a 10% down payment. Conventional loans require 20% down payment. Use the current rate of 4.5% at 30 years to calculate the mortgage for the Conventional loan. Use the current ARM rates for the Adjustable Rate Mortgage. Show all work for full credit.

Compute the per month cost including  interest, taxes and insurance (use above formula to get the taxes and insurance cost).

Show your work:

What will their down payment be?

Down payment = 20% of the purchasing price

= 300,000 * 20%

= $ 60,000

2) What will the cost of insurance be per month?

Cost of insurance = 1/2 * 1% of 300,000

= $ 1,500

Per month = 1500/12

= $ 125

3) What will their taxes be per month?

Taxes = $3.00 per $100 of assessed value

= 75% of 300,000

Addressed value = 300,000 * 75% = $ 225,000

Per $ 100 = 2250 * 3 = $ 6750 per year

Therefore, the monthly tax = 6750/12

= $ 562.5

4) What will their principal and interest be per month?

The loan term = 30 years

If the Principle = 300,000 – 60,000 = $ 240,000

Interest = ARM Interest of Principle Amount

= 4.5%/12 months

= 0.00375

Monthly principle and interest payment = M

M = 240,000 [0.00375 (1+0.00375)^360/(1+0.00375)^360 – 1]

M = $ 1215.97

5) What is their total monthly payment going to be including everything?

Therefore the total monthly payment;

= Principle & Interest + Taxes + Insurance

= 1215.97 + 562.5 + 125

= $ 1903.472