Case
Evaluating a Mortgage Loan for the Gerrards
Ben and Marie Gerrard, both in their mid-20s, have been married for four years and have two preschool-age children. Ben has an accounting degree and is employed as a cost accountant at an annual salary of
62,000. They’re now renting a duplex but wish to buy a home in the suburbs of their rapidly developing city. They’ve decided they can afford a
215,000 house and hope to find one with the features they desire in a good neighborhood.
The insurance costs on such a home are expected to be
800 per year, taxes are expected to be
2,500 per year, and annual utility bills are estimated at
1,440—an increase of
500 over those they pay in the duplex. The Gerrards are considering financing their home with a fixed-rate, 30-year, 6 percent mortgage. The lender charges 2 points on mortgages with 20 percent down and 3 points if less than 20 percent is put down (the commercial bank that the Gerrards will deal with requires a minimum of 10 percent down). Other closing costs are estimated at 5 percent of the home’s purchase price. Because of their excellent credit record, the bank will probably be willing to let the Gerrards’ monthly mortgage payments (principal and interest portions) equal as much as 28 percent of their monthly gross income. Since getting married, the Gerrards have been saving for the purchase of a home and now have
44,000 in their savings account.
Critical Thinking Questions
1. How much would the Gerrards have to put down if the lender required a minimum 20 percent down payment? Could they afford it?
2. Given that the Gerrards want to put only
25,000 down, how much would their closing costs be? Considering only principal and interest, how much would their monthly mortgage payments be? Would they qualify for a loan using a 28 percent affordability ratio?
3. Using a
25,000 down payment on a
215,000 home, what would the Gerrards’ loan-to-value ratio be? Calculate the monthly mortgage payments on a PITI basis.
4.What recommendations would you make to the Gerrards? Explain.