Reference no: EM132373626

Problem:

Suppose you borrow $250,000 PLAM (Price Level Adjusted Mortgage) for 30 years, monthly payments with $6,000 origination cost.  The mortgage rate is 6% with annual outstanding balance adjustments based on the following inflation information:

Inflation information

Year Home Price

1 4%

2 -5%

3-30 0

Questions:

1. What is the APR for this loan?
2. What is the effective cost if holding the loan for only 5 years?
3. What is the effective cost of this loan if holding only for 1 year?

Problem:

You decide to buy a house of $250,000 with loan amount of $200,000 and you plan to sell the house in year 10. The lender offers the following three SAM choices with $5,000 origination cost for each choice:

• $200,000; 30 years; monthly payment; 0% interest rate; 50% of appreciated value of the property in year 10. In addition, if the property is sold for a loss in year 10, the lender pays nothing.
• $200,000; 30 years; monthly payment; 3% interest rate; 50% of appreciated value of the property in year 10
• $200,000; 30 years; monthly payment; 5% interest rate; 25% of appreciated value of the property in year 10

The housing market conditions:

1. Home price will appreciate 30% in total for the next 10 years;
2. Home price will stay the same for the next 10 years
3. Home price will decline 30% in total for the next 10 years.