Mortgage Loan?

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The Young family is purchasing a $ 130,000 house with a VA mortgage. The bank is offering them a 25-year mortgage with an interest rate of 9.5%. They have $ 20,000 invested that could be used for a down payment. Since they do not need a down payment, Mr. Young wants to keep the money invested. Mrs. Young believes that they should make a down payment of $ 20,000. a) Determine the total cost of the house with no down payment & b) total cost, if they make a down payment of $ 20,000. c)Mr. Young believes that the $ 20,000 investment will have an annual rate of return of 10% compounded quarterly. Assuming that Mr. Young is right, calculate the value of the investment in 25 years. d) If the Young’s use the $ 20,000 as a down payment, their monthly payments will decrease. Determine the difference of the monthly payments in parts (a) and (b).

My husband and I both qualify for a VA loan. We don’t have the best credit (I’m at 580 ish and he’s about the same). We are working at improving our credit by the time we try to buy our first house next year. I have a few questions:
1) Will improving our score help our intrest rate with a VA loan (I know it will help with everything else)
2)What type of out of pocket costs should we expect?(closing etc.)
3)Will putting money down help our chances at getting a loan?

Any other advice you have I would be great!

  1. Reply
    January 29, 2011 at 2:24 pm

    a) 142350 = 130000 * 1.095

    b) 130000-20000 = 110000 * 1.095 = 120450

    c) I think I did something wrong, because I got a number that didn’t make sence….

    d) 142350/300 = 474.5 120450/300 = 401.5
    diff = 73

    Hope that helps

  2. Reply
    January 29, 2011 at 3:08 pm

    Nice practical problem. Great for an exam in a
    math class!
    Let’s do each part separately:
    a). This is an example of a present value problem.
    We want to calculate the monthly payment, then
    multiply the result by 300 to determine the total cost
    of the house.
    The formula for the present value of the loan is
    P = R/i[1 -(1+i)^-n]
    Here P is the value of the debt
    or 130000
    R is the monthly payment, the unknown
    i is the interest rate or .095/12, since
    the payments will be made monthly.
    So i = .00791666.
    n is the number of payment periods or 25*12 = 300.
    Substituting and solving,
    we find
    R = 130000*.00791666/( 1-(1.00791666)^-300)
    R = 1135.80
    Total cost of house 1135.80*300 = 340741.48,
    assuming 300 equal payments of 1135.80 are made.

    b). Same calculation, except use 110000
    instead of 130000 and we find
    R = 961.19 and total cost of house = 288356.37

    c). Here S = P(1+i)^n
    and we have i = .10/4 = .025 and n = 100
    So S = 20000(1.025)^100 = 236274.33

    d). Difference = 1135.80 – 961.19 = 174.61.
    Hope that helps!

  3. Reply
    January 29, 2011 at 4:07 pm

    Yes it will help with the interest rate. Putting money down will always help your chances. If you can find a strong cosigner that would also help. Without knowing how much your loan is and how long a period it is over and the interest rate then no one can tell you how much you can expect to pay.

  4. Reply
    January 29, 2011 at 4:41 pm

    Yes, improving your score will help your interest rate. Also since the VA does not solely look at the score and views credit history if you have over 1 full year of on time payments you will be much more likely to get the loan. Just make sure your debt to income ratio is under 41% this includes all credit liabilities plus how much your mortgage taxes and insurance will cost per month divided by your income. You don’t necessarily need a downpayment but you should try to at least be able to pay the funding fee up front rather than having to include that in the mortgage. And if you have a good realtor you should have to pay closing costs since normally realtors can negotiate the seller to pay those in the contract. And you can’t have a cosigner on VA, only the veteran and spouse may apply for VA loans.

  5. Reply
    January 29, 2011 at 5:20 pm

    VA home loans are a unique way of extending support to the US war veterans, who committed their lives in safeguarding the interests of the country. Therefore, understanding these loans is beneficial. VA housing loan program provides financial assistance to veterans so that they can purchase home at a favorable rate of interest and convenient loan terms. Loans provided by the VA are fixedproperty in a safe locality. Next, the veteran has to go to a lender and apply for a home loan. VA guaranteed loans are provided by private lenders that include banks, mortgage companies and savings and loan associations. No prepayment penalties and long amortization terms are another advantage of these loans.

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