Evaluation of mortgage option value.
Kim and Dan Bergholt are both government workers. They are considering purchasing a home in the Washington D.C. area for about $280,000. They estimate monthly expenses for utilities at $220, maintenance at $100, property taxes at $380, and home insurance payments at $50. Their only debt consists of car loans requiring a monthly payment of $350.
Kim's gross income is $55,000/year and Dan's is $38,000/year. They have saved about $60,000 in a money market fund on which they earned $5,840 last year. They plan to use most of this for a 20% down payment and closing costs. A lender is offering 30-year variable rate loans with an initial interest rate of 8% given a 20% down payment and closing costs equal to $1,000 plus 3 points.
Before making a purchase offer and applying for this loan, they would like to have some idea whether they might qualify.
1. Suppose they do qualify; what other factors might they consider before purchasing and taking out a home mortgage?
2. What future changes might present problems for the Bergholts?