The Johnsons have accumulated a nest egg of $25,000 that they intend to use as a down payment toward the purchase of a new house. Because their present gross income has placed them in a relatively high tax bracket, they have decided to invest a minimum of $1,000/month in monthly payments (to take advantage of their tax deductions) toward the purchase of their house. However, because of other financial obligations, their monthly payments should not exceed $1,800. If local mortgage rates are 9.5%/year compounded monthly for a conventional 40-year mortgage, what is the price range of houses that they should consider?

Question

If the Johnsons decide to secure a 20-year mortgage instead of a 40-year mortgage, what is the price range of houses they should consider when the local mortgage rate for this type of loan is 9%?

a. The price of houses for 40-yr mortgage lies between $5,461,292 and $9,810,325; for 20-yr mortgage – between $692,887 and $1,227,196.
b. The price of houses for 40-yr mortgage lies between $148,447 and $247,205; for 20-yr mortgage – between $136,145 and $225,061.
c. The price of houses for 40-yr mortgage lies between $136,145 and $225,061; for 20-yr mortgage – between $148,447 and $247,205.

Answer 1

b. The price of houses for 40-yr mortgage lies between $148,447 and $247,205; for 20-yr mortgage – between $136,145 and $225,061.