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%


Please select the best answer from the choices provided

A
B
C
D

Answer 1

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

Calculate each option (30-yr fixed, n = 360 months; monthly rate = annual rate/12):

a) 3.5% down: down = 0.035×276,650 = $9,682.75
loan = $276,650 − $9,682.75 = $266,967.25
rate = 6.50% → monthly ≈ $1,689 (≫ $1,342.50)

b) 5% down: down = $13,832.50
loan = $262,817.50
rate = 6.25% → monthly ≈ $1,618 (≫ $1,342.50)

c) 6.5% down: down = $17,982.25
loan = $258,667.75
rate = 5.75% → monthly ≈ $1,510 (≫ $1,342.50)

d) 10% down: down = $27,665
loan = $248,985
rate = 5.00% → monthly ≈ $1,338 (≤ $1,342.50)

Only option D keeps the payment at or below 30% of his income. Recommendation: D.