Question

Theresa is buying a condo that costs $127,500. She has $8,300 in savings and earns $3,200 a month. Theresa would like to spend no more than 20% of her income on her mortgage payment. Which loan option would you recommend to Theresa?
a.
30 year fixed, 6.5% down at a fixed rate of 5%
b.
30 year FHA, 3.5% down at a fixed rate of 6.5%
c.
30 year fixed, 5% down at a fixed rate of 6.25%
d.
30 year fixed, 10% down at a fixed rate of 5.75%

Answer 1

Answer: (a)

Work shown:
- 20% of monthly income = 0.20 × $3,200 = $640 max mortgage payment.

Compute down payments and principal:
- (a) 6.5% down = 0.065×127,500 = $8,287.50 → loan = $127,500 − $8,287.50 = $119,212.50. 30-yr @5% → monthly ≈ $639.94 (just under $640).
- (b) 3.5% down = $4,462.50 → loan = $123,037.50. 30-yr @6.5% → monthly ≈ $778 (over $640).
- (c) 5% down = $6,375 → loan = $121,125. 30-yr @6.25% → monthly ≈ $746 (over $640).
- (d) 10% down = $12,750 → loan = $114,750. 30-yr @5.75% → monthly ≈ $669.50 (over $640).

Only option (a) meets the $640/month cap and Theresa has enough savings for the down payment ($8,300). Caveat: option (a) would leave her with almost no savings ($≈$12.50), and you should also account for closing costs, taxes, insurance, and any PMI — so she should either save a little more before buying or confirm total cash needed and monthly escrow/insurance/taxes.