DOWN PAYMENT

(Phillip Storms) A perplexing analysis concerns how much to put down on a loan, how much to pay per month and what are the ways to determine which might be best. An example shows how to do the analysis.

Assume a purchase of a $110,000 home, down payment of 5%- $5,000, loan of $108,990 (3.8% insurance), payments of $883 per month (8.5% + $45) and a balance of $96,568 at the end of 10 years.

Second alternative of 10% down- $11,000, loan of $101,178 (includes insurance of 2.2%), payments of $778 per month (8.5%) and a balance of $89,646 at the end of 10 years.

Third alternative of 20% down- $22,000, loan of $88,000, payments of $677 per month (8.5%) and balance of $77,970 at the end of 10 years.

Loan 1 Loan 2 Loan 1- 2

Down $5,000 $11,000 -$6,000

Monthly 883 778 105

10 year 96,568 89,646 6,922

By using an HP 12c with PV of $6,000, PMT = $105, FV = 6,922 and N = 120, the investment of an additional $6,000 of higher down equates to a 21.45% annual return.

Loan 2 Loan 3 Loan 2- 3

Down $11,000 $22,000 -$11,000

Monthly 778 677 101

10 year 89,646 77,970 11,676

The return on the extra $11,000 down equates to a 11.35% annual return. Assuming the homeowner could do this (requires separate analysis in itself) it certainly appears to be worthwhile to put more down- particularly at the lower end of the scale.

REFINANCE: This same method can be used to determine if a refinance is financially worthwhile. Assume:

Current loan $200,000

Interest rate 9.875%

Remaining term 29.5 years

Estimated occupancy 8 more years

Monthly payment $1,742

Balance in 8 years $186,087

New Loan $200,000

Interest rate 9.125%

Term 30 years

Occupancy 8 more years

Monthly Payment $1,627

Refinancing costs $1,400

Balance in 8 years $185,033

The homeowner is making a $1,400 investment to save $114 and have an increased equity of $1,054 at the end of eight years. By using the same calculations, the effective interest rate on the investment is 97.7% per year- obviously a wise decision. But you have to reasonably "know" how long you intend to live in the house- otherwise the calculations are invalid.

POINTS: This same scenario can be used for points on a loan.

Option 1 Option 2 Opt. 1- 2

8.5% 8.25+1pt

Cash $22,000 $22,880 $880

Monthly 677 661 16

10 years 77,970 77,570 380

The client invests $880 per month for a $16 per month reduction in mortgage payments and $380 additional equity at the end of 120 payments.

Using PV= - $880, N= 120, PMT= 16 and

FV= 380, i= a 20.01% annual return.

Under the conditions stated, paying an extra $880 is worthwhile due to the high return produced over 10 years.

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