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You are about to purchase your first home for personal use. The price of the house is $400K. The property taxes and casualty insurance are estimated at $200 and $100 per month respectively; these two costs are each month in your escrow. You are estimating $3,500 in closing fees and expect to get a 15 year fixed rate mortgage for a fixed 4.9% with 2 points. Assume taxes and insurance remain constant for the duration of the loan. Your PMI payment is $200/month and will be needed as long as LTV is more than or equal to 80%. The appraised value of the house is expected to rise at 2% each year (end of year). You are in a 30% tax bracket. All tax credits in a given year will be received at the end of the year. You have two options:
1) You put down $40,000 on the home (plus any points and closing fees) and take out a 360K mortgage.
2) You put down $40,000 on the home (plus any points and closing fees), borrow another $40,000 from your uncle Vini and pay this back at 10% annual effective interest rate with 4 payments on 02/30/2010, 02/30/2011, 02/30/2012, 02/30/2013 (the interest portion of 40K loan from uncle Vini is non-tax deductable). You get a 320K mortgage.
You take out the mortgage and buy the house on March 1 2009. The first payment of the mortgage is due at the beginning of April 2009. You will sell the property on April 1st 2024 (15 years later) at appraised value. MARR is 10% per year compounded monthly. What is the present cost of these transactions at March 1st 2009 under each option (attach spreadsheet):
Option 1________________
Option 2________________
Should you borrow from the uncle?____________
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