Question

Eli is buying a townhouse that costs $276,650. He has $28,000 in savings and earns $4,475 a month. Eli would like to spend no more than 30% of his income on his mortgage payment. Which loan option would you recommend to Eli?
a.
30 year FHA, 3.5% down at a fixed rate of 6.5%
b.
30 year fixed, 5% down at a fixed rate of 6.25%
c.
30 year fixed, 6.5% down at a fixed rate of 5.75%
d.
30 year fixed, 10% down at a fixed rate of 5%

Answer 1

Eli’s 30% monthly cap = 0.30 × $4,475 = $1,342.50.

Compute down payment, loan amount, and 30-year (360-month) payment for each option (monthly rate = annual rate/12):

a) 3.5% down, 6.5% rate
- Down = 0.035 × 276,650 = $9,682.75
- Loan = $266,967.25
- Monthly ≈ $1,688 → exceeds $1,342.50

b) 5% down, 6.25% rate
- Down = $13,832.50
- Loan = $262,817.50
- Monthly ≈ $1,617 → exceeds $1,342.50

c) 6.5% down, 5.75% rate
- Down = $17,982.25
- Loan = $258,667.75
- Monthly ≈ $1,509 → exceeds $1,342.50

d) 10% down, 5.0% rate
- Down = $27,665
- Loan = $248,985
- Monthly ≈ $1,337 → below $1,342.50

Recommendation: (d) 30-year fixed, 10% down at 5.0%. It is the only option with a monthly mortgage payment within Eli’s 30% income limit, and his $28,000 savings just covers the 10% down payment.