Question

Reyna is thinking about buying a house. She has looked at two separate homes in the same neighborhood. House A (5 bed/2 bath/2 garage) has a list price of $275,000 and is 2100 square feet, while house B (4 bed/3 bath/2 garages) has a list price of $182,000 and is 1500 square feet. She is considering going with a 5/1 ARM, and the bank has asked for a 20% down payment on the loan.

Part I: What is the price per square foot of house A?

Part II: What is the price per square foot of house B?

Part III: How many bedrooms and bathrooms does house A have?

Part IV: How many bedrooms and bathrooms does house B have?

Part V: Reyna is considering a 5/1 ARM. What does "ARM" stand for?

Part VI: If Reyna has a 5/1 ARM, how long will the fixed interest rate be applied to her loan

Part VII: What is the down payment for house A?

Part VIII: What is the down payment for house B?

Part IX: If Reyna can afford a down payment of $50,000, which house, if any, can she afford?

Part X: A week later, house C (5/3/3) with 1900 square feet is listed on the market, with a price listed as "negotiable." If the average price per square foot is $125, what can Reyna expect to pay for this house?

Answer 1

I. Price/sq ft of A is 275000/2100=$130.95/sq ft.
II. Price/sq ft of B is 182000/1500=$121.33/sq ft.
III. 5 bed, 2 bath
IV. 4 bed, 3 bath
V. Adjustable rate mortgage for 5 years. The initial rate applies for 5 years after which it is subject to change.
VI. 5 years.
VII. Down payment is $55000.
VIII. Down payment is $36400.
IX. House B.
X. $237500 (1900×125)