70.2K

Verified Solution

Link Copied!

Joe is looking for a house in LA to purchase. Market Price: $2,395,000 To finance the house purchase, Joe can obtain a 30-year mortgage at 3% APR, that requires monthly payment. In addition, Joe can choose one of the following two forms of mortgage subsidies provided by its employer: 1. $100,000 reduction in mortgage principal, i.e., if Joe obtains a $1,500,000 mortgage, he only owes $1,400,000 on the mortgage. 2. Option 2 is a cash subsidy and pays out $10,000 per year for 10 years. Joe's monthly income is $25,000. The bank can lend to up to a debt-to-income ratio of 36% (i.e., monthly payment/Income = 36%). After 30 years, Joe can sell the house at 5 times of its market price today. If Joe does not purchase a house, Joe will not be able to cash out the mortgage subsidies, and his rental payment is $5,000 every month, which grow at 1% every month. You are Joe's financial advisor. Joe's required rate of return is 1.5% per month in the following 30 years. You need to prepare a report that provides answers to the following questions: 1. (1) If Joe wants to buy the house, how much down payment he needs to have? 2. (2) If Joe wants to buy the house, which of the two mortgage subsidy packages should he choose? Hint: Compare the PV of the two options. 3. (3) Should Joe buy a house or keep renting given his required rate of return? What is the net present value of house purchase? Note: Rental payments are paid at the beginning of each month; and mortgage payments are made at the end of each month. Hint: You need to find the present value of all future cash flows. Benefits of home purchase include saved rental payments, mortgage subsidies, and house sale in 30 years; and costs of home purchase include mortgage payments and down payments. Joe is looking for a house in LA to purchase. Market Price: $2,395,000 To finance the house purchase, Joe can obtain a 30-year mortgage at 3% APR, that requires monthly payment. In addition, Joe can choose one of the following two forms of mortgage subsidies provided by its employer: 1. $100,000 reduction in mortgage principal, i.e., if Joe obtains a $1,500,000 mortgage, he only owes $1,400,000 on the mortgage. 2. Option 2 is a cash subsidy and pays out $10,000 per year for 10 years. Joe's monthly income is $25,000. The bank can lend to up to a debt-to-income ratio of 36% (i.e., monthly payment/Income = 36%). After 30 years, Joe can sell the house at 5 times of its market price today. If Joe does not purchase a house, Joe will not be able to cash out the mortgage subsidies, and his rental payment is $5,000 every month, which grow at 1% every month. You are Joe's financial advisor. Joe's required rate of return is 1.5% per month in the following 30 years. You need to prepare a report that provides answers to the following questions: 1. (1) If Joe wants to buy the house, how much down payment he needs to have? 2. (2) If Joe wants to buy the house, which of the two mortgage subsidy packages should he choose? Hint: Compare the PV of the two options. 3. (3) Should Joe buy a house or keep renting given his required rate of return? What is the net present value of house purchase? Note: Rental payments are paid at the beginning of each month; and mortgage payments are made at the end of each month. Hint: You need to find the present value of all future cash flows. Benefits of home purchase include saved rental payments, mortgage subsidies, and house sale in 30 years; and costs of home purchase include mortgage payments and down payments

Answer & Explanation Solved by verified expert

See Answer