Part A – House Financing
Vivian wants to buy a house. The house she wants is listed for $350,000, and she wants to avoid PMI insurance. She can get a fixed rate mortgage at 3.75% for 30 years.
(Don’t worry about closing costs, taxes, and homeowners insurance for any of these questions, just keep in mind that those would need to be considered as well.)
What down payment will she need?
If Vivian makes her down payment and takes out the loan described, what will be her monthly payment?
If Vivian makes her down payment and takes out the loan described, what will be the total cost of the house?
What would be the total cost of the house if she took out a 15-year mortgage at 3.00%?
PART B. She sees an advertisment for a 2016 Ford Fiesta. 0% APR for 66 months or 2000 cash back.
She has negotiated a sales price of $14,580 and she has a $1,000 down payment. She is eligible for the full $2,000 cash rebate. Her bank has pre-approved her for a 60-month car loan at 3.20%.
a) Assuming Alejandra wants the cheapest overall price, which option should she take? Should she take the 0% financing offer for 66 months from the dealer, or should she borrow the money from her bank at 3.20% to pay the dealer and receive the $2,000 cash rebate?
b) Why should Alejandra make this decision based on overall price, not monthly payment?
Now suppose she is only able to get $950 cash back (with the 3.20% financing from her bank). Does this change her decision?
Suppose Alejandra can only arrange financing at 7.50% instead of 3.20%. The cash rebate remains at $2,000. Does this change her initial decision?
What if Vivian can only pay a 15% down payment, what would her first monthly payment be for the 30-year mortgage at 3.75%? (Assume PMI insurance cost is 1% of the loan amount per year.)