1. Ann wants a mortgage to buy a house. Ann gives the following information to the bank:
Income: $240k/year or 20k/month
Average monthly debt: $2k
Estimated monthly Taxes + Insurance: $700
Down-payment: $50k saved
-Ann’s down-payment will be $50k, she will take out a mortgage for the remainder
Ann qualifies for a 30 year FA-CPM-FRM (monthly payments & monthly compounding) with:
Annual interest rate: 4%
Income test: (front end 28% / back end 36%)
Collateral test:
Closing costs + buy-down points: $5,000 + 1.75% of the balance at origination.
-Example: if Ann gets a $100k mortgage, she will pay $5k + $1.75k=$6.75k at origination.
Fill in the spreadsheet (sheet “Underwriting”) for Ann.
1.2: based on the FE DTI what is the biggest payment Ann can make?
1.3: based on the BE DTI what is the biggest payment Ann can make?
1.4: based on both the FE & BE DTI what is the biggest payment Ann can make?
1.5: based on both the FE & BE DTI what is the biggest loan Ann can get?
1.6: based the LTV test and Ann’s $50k down-payment, what is the biggest loan Ann can get?
1.7: based on the income & collateral tests, what is the biggest loan Ann can get?
1.8: based on the income & collateral tests, what is the biggest payment Ann can make?
1.9: if Ann makes a 50k down-payment, how much house can Ann afford?
1.10: how much are Ann’s total mortgage closing costs?
QUESTION 2
Ann would like to buy a house.
It costs $2,500,000.
Her down payment will be $50,000.
She will take out a mortgage for the remainder.
It will be a 30 year, fully amortizing, FRM, with constant monthly payments and monthly compounding.
The annual interest rate is 4.00%.
She will pay $5,000 in closing costs at origination.
She will also pay 1.75% of the balance in buy-down points at origination.
Note: the home is bought and the loan is taken in month 0, the first payment is due in month 1.
In the spreadsheet where it says “cash inflow”, “outflow” and “net cash flow” you should only take into account cash flow related to the mortgage.
Use the spreadsheet (sheet “FA AMORTIZATION SCHEDULE”) for Ann.
(It is called an amortization schedule or amortization calendar.)
Compute Ann’s annualized IRR for the mortgage in the spreadsheet. (Use the net cash flow.)
What is the annualized IRR for the mortgage?
Is it higher or lower than the mortgage contract rate?
QUESTION 3
She forecasts four possible scenarios for house price appreciation (HPA).
Optimistic Case: 4.5% annual HPA, hence 4.5%/12 monthly HPA
Base Case: 2.5% annual HPA, hence 2.5%/12 monthly HPA
Pessimistic Case: 0% annual HPA, hence 0%/12 monthly HPA
Very Bad Case: -6% annual HPA, hence -6%/12 monthly HPA
Assume Ann will make the required monthly payment every month for 30 years.
How much home equity will Ann have after 10 years (120 months) of payments under each of the four scenarios?
HPA 4.5% ?
HPA 2.5%?
HPA 0.0%?
HPA -6.0%?
How much home equity will Ann have After 30 years (360 months) of payments under each of the four scenarios?
HPA 4.5%?
HPA 2.5%?
HPA 0.0%?
HPA -6.0%?
