When Should Michael Pay Housing Costs? On April 1 of next year, Michael is purchasing a $225,000 condominium and has accepted the Tenth National Bank’s offer of a ten-year $182,250 loan with an interest rate of 7%. He has a gross annual income of $100,000 and is concerned about how much his one-time up-front costs and recurring monthly costs will be. He’s received the following data and form, but he’s not certain when he is to pay each cost—at closing, monthly, or both. Your task is to help Michael by completing the form and classifying the costs. Hint: Remember that the purchase is expected to close on the first of April. This means the following: • Although a year’s worth of a cost, such as the condominium’s property taxes, may be owed by the home buyer, a portion of the total cost will be paid by the seller. • A portion of a cost, such as the homeowner’s insurance premium, may be deposited into an escrow account so that the accumulated funds will be available to pay the entire annual premium when it is due next year. • For its mortgage, the bank will permit a 19% down payment but will also require 2 points. Mortgage insurance is required if the loan-to-value (LTV) ratio is less than 20%. • A private mortgage insurance (PMI) policy, if necessary, is expected to cost $729 per year, but is distributed 12 times per year. • Michael has purchased a home warranty policy, which carries an annual premium of $480 and is paid 12 times per year, and a homeowner’s insurance policy, which costs $2,250 per year. Premiums for these two policies are paid to the respective insurance companies from an escrow account at the bank. • Credit report fee: $85 • Title search and deed recording fee: $450 • Loan origination fee: $900 • Title insurance policy—Lender: $375 • Mortgage payment (principal and interest): $2,112 • Appraisal and survey fees: $600 • Attorney fees: $1,125 • Home, termite, and radon Inspections: $575 • Title insurance policy—Homeowner: $450 • Messenger and document fees: $315 • Property taxes on the condominium: $11,250 per year • The property taxes and homeowner’s policy should be pro-rated.

When Should Michael Pay Housing Costs? On April 1 of next year, Michael is purchasing a $225,000 condominium and has accepted the Tenth National Bank’s offer of a ten-year $182,250 loan with an interest rate of 7%. He has a gross annual income of $100,000 and is concerned about how much his one-time up-front costs and recurring monthly costs will be. He’s received the following data and form, but he’s not certain when he is to pay each cost—at closing, monthly, or both. Your task is to help Michael by completing the form and classifying the costs. Hint: Remember that the purchase is expected to close on the first of April. This means the following: • Although a year’s worth of a cost, such as the condominium’s property taxes, may be owed by the home buyer, a portion of the total cost will be paid by the seller. • A portion of a cost, such as the homeowner’s insurance premium, may be deposited into an escrow account so that the accumulated funds will be available to pay the entire annual premium when it is due next year. • For its mortgage, the bank will permit a 19% down payment but will also require 2 points. Mortgage insurance is required if the loan-to-value (LTV) ratio is less than 20%. • A private mortgage insurance (PMI) policy, if necessary, is expected to cost $729 per year, but is distributed 12 times per year. • Michael has purchased a home warranty policy, which carries an annual premium of $480 and is paid 12 times per year, and a homeowner’s insurance policy, which costs $2,250 per year. Premiums for these two policies are paid to the respective insurance companies from an escrow account at the bank. • Credit report fee: $85 • Title search and deed recording fee: $450 • Loan origination fee: $900 • Title insurance policy—Lender: $375 • Mortgage payment (principal and interest): $2,112 • Appraisal and survey fees: $600 • Attorney fees: $1,125 • Home, termite, and radon Inspections: $575 • Title insurance policy—Homeowner: $450 • Messenger and document fees: $315 • Property taxes on the condominium: $11,250 per year • The property taxes and homeowner’s policy should be pro-rated.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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When Should Michael Pay Housing Costs?

On April 1 of next year, Michael is purchasing a $225,000 condominium and has accepted the Tenth National Bank’s offer of a ten-year $182,250 loan with an interest rate of 7%. He has a gross annual income of $100,000 and is concerned about how much his one-time up-front costs and recurring monthly costs will be.

He’s received the following data and form, but he’s not certain when he is to pay each cost—at closing, monthly, or both. Your task is to help Michael by completing the form and classifying the costs. Hint: Remember that the purchase is expected to close on the first of April. This means the following:

•	Although a year’s worth of a cost, such as the condominium’s property taxes, may be owed by the home buyer, a portion of the total cost will be paid by the seller.
•	A portion of a cost, such as the homeowner’s insurance premium, may be deposited into an escrow account so that the accumulated funds will be available to pay the entire annual premium when it is due next year.
•	For its mortgage, the bank will permit a 19% down payment but will also require 2 points. Mortgage insurance is required if the loan-to-value (LTV) ratio is less than 20%.
•	A private mortgage insurance (PMI) policy, if necessary, is expected to cost $729 per year, but is distributed 12 times per year.
•	Michael has purchased a home warranty policy, which carries an annual premium of $480 and is paid 12 times per year, and a homeowner’s insurance policy, which costs $2,250 per year. Premiums for these two policies are paid to the respective insurance companies from an escrow account at the bank.
•	Credit report fee: $85
•	Title search and deed recording fee: $450
•	Loan origination fee: $900
•	Title insurance policy—Lender: $375
•	Mortgage payment (principal and interest): $2,112
•	Appraisal and survey fees: $600
•	Attorney fees: $1,125
•	Home, termite, and radon Inspections: $575
•	Title insurance policy—Homeowner: $450
•	Messenger and document fees: $315
•	Property taxes on the condominium: $11,250 per year
•	The property taxes and homeowner’s policy should be pro-rated.

Amount Paid
Cost Incurred
At Closing
Monthly
$
$
$
2$
$
$
Using the given information, what is the loan-to-value (LTV) ratio required by the Tenth National Bank?
19.00%
O 81.00%
O 123.46%
Michael's total closing costs are
of his mortgage, and his monthly costs are
of monthly income.

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