Lucinda Lacy purchased a foreclosed house today for $105,500 by making a down payment of 15% of the purchase price and paying closing costs of:
Loan origination fee 1.7% of purchase price
Appraisal fee $325
Survey fee 210
Attorney’s fee 420
Processing fee 300
Escrow fee 240
Other miscellaneous costs 620
Lucinda has a mortgage loan with an interest rate of 3.9% APR, compounded monthly for 30 years. Her taxes and insurance are $375 per month. Lucinda has an estimate for a contract for $8,500 firm, fixed price to remodel the house and this expense will be equally distributed over the period of her ownership. After remodeling, she estimates that she could sell the house for $135,000. Her selling expenses would be 7% sales commission plus $1000.
Determine manually (handwritten), by trial and error, Lucinda’s rate of return, if she owns the house for 6 months.
Note: To get full credit, you must show the manual (handwritten), calculations, including the ball-park method with all the appropriate cash flow diagrams.
Textbook: Engineering Economy 7th Edition. Leland Blank
To fully find her rate of return we need to solve each step:
1. What is her monthly payment on bankloan? A/P
2. Find the value of the loan payoff? P/A
3. What did she invest on day zero?
-Down Payment - 15% of cost of house - closing costs
4. What were her monthly expenses?
-Taxes and Insurance - 8500/6 - Bank Loan Payments
5. Her Return