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Engineering Economics

Essay Question:

You wish to purchase a home for \$150,000 and you can put down 10% of this price as down payment. You can get a 20 year fixed rate mortgage loan for 6.0% with no points. You can optionally decide to pay 2 points to bring the mortgage rate down to 5.25%. Your closing fees (not including points) are expected to be \$3,300. Your PMI (if applicable) is \$150/month for the first 4 years (after which you will have 20% equity), your property taxes are \$3,600/year and your casualty insurance is \$2,400/year. Your lender will collect the PMI, property tax and hazard insurance as monthly escrow payments along with your principal and interest payments.

a. What is the initial TOTAL CASH required to buy this house AT CLOSING with the given mortgage fees and down payment provided that you choose the 5.25% loan option?

b. What is the initial monthly payment (including PMI and monthly escrow) for the 6% loan option?

c. If you intend to live in the home for 5 years or less, which loan option should you take (i.e. pay points or not)? Assume MARR to be 10% on your other investments. You must show your work to mathematically justify your answer in order to get full credit. (NOTE: you can analyze this on an annual savings basis by multiplying the monthly savings by 12 and perform a reverse look-up of your N value in the 10 percent interest tables that were provided with the exam).