When giving housing loans, financial institutions check, whether applicants qualify for the loan. For example, your down payment should exceed a certain percentage of the property value and your monthly payments (mortgage, property taxes etc.) should be less than a certain percentage of household’s gross (pre-tax) monthly income.
Using the following parameters as variable inputs, please develop a model, which addresses the questions at the bottom
– Household annual pre-tax income Household liquid assets available for down payment
– House price:
– Real estate (property) tax:
– Loan characteristics Maturity:
– Payment frequency:
– Minimum down payment requirement:
– All house-related payments (mortgage property taxes etc.) as a percentage of gross (pre-tax) income should not exceed
.- Create loan amortization schedule (double check your calculations by using alternative methods to calculate payments).
– Should this household receive the loan? What is the maximum mortgage loan that can be given to this household?
– Now assume that you have purchased the house 5 years ago (has to be an input) and you get an offer to refinance into a new 30 year (has to be an input) mortgage with 4.00% APR (has to be an input). The fixed cost of refinancing is a one-time fee (another input).
• Is it to your benefit to refinance?
-What factors influence your decision? (Make any additional assumptions you deem necessary.)