A young physician makes $250,000 per year with an annual salary increase of 2%. He is interested in buying a house. He has $130,000 in his savings account. The appraisal value for the house is $600,000.
After exhaustive shopping for a mortgage, a bank offered him these options:
1. A mortgage for 30 years, 5.00% fixed, 0-points, with 20% down payment; or
2. A mortgage for 20 years, 4.50% fixed, 0-points, with 20% down payment; or
3. A mortgage for 15 years, 4.00% fixed, 0-points, with 20% down payment; or
4. A mortgage for 10 years, 3.50% fixed, 0-points, with 20% down payment; or
5. An ARM for 5 years, 3.00% fixed, 0-points, with 20% down payment, then 6% afterwards.
Note the following:
All closing costs, regardless of loan type are $10,000 payable at closing.
Escrow charges are $1,000 per month (assume that this is also tax deductible, and part of the debt-equity calculation)
His debt to equity ratio needs to be maintained at no more than 20% (this is calculated by dividing his mortgage payment including the escrow by his monthly GROSS salary)
Assume that all tax deductions including, local taxes, contributions to charity, certifications upkeep, malpractice insurance, tax-deferred retirement payments, disability and life insurances, and all other tax deductibles are $50,000/year.
He is married, and has 3 children (assume that deductions per dependent are $3,500). Assume that this situation will stay the same during the entire duration of this project.
All interest and closing costs are tax-deductible.
He is being taxed using the IRS tax tables for 2014.
For simplicity purposes, assume that these tax tables will be the same for the next 30 yrs.
Assume that interest rates accrues once per month (ie, use 12 periods per year).
Determine which plan best fits the person’s budget.