Final answer:
To borrow 90% of the purchase price of a house, one must understand the terms of the primary mortgage and home equity loan, including interest rates, points, and lender fees. Calculations of monthly payments, total interest, and overall costs are crucial for informed decision-making in home purchasing.
Step-by-step explanation:
When considering using a combination of loans to borrow 90% of the purchase price of a house, it is important to understand the financial terms and how they will impact the total cost of the mortgage over time. With a $300,000 purchase price, an 80% loan-to-value (LTV) primary mortgage at a 4.875% interest rate and a 10% LTV home equity loan at a 5.75% interest rate illustrate a common strategy to minimize upfront costs like down payments. However, aside from the interest rates, other factors such as points, lender fees, and the terms of the loans can significantly affect the monthly payments and the total amount paid over the life of the loans.
1.0 points on the primary mortgage indicate that 1% of the loan amount is due at closing as upfront interest, likely to secure a slightly lower ongoing interest rate. The absence of lender fees on this primary mortgage is advantageous, as fees can add considerable expense to the closing costs. Conversely, the home equity loan includes a $500 upfront lender fee but no points, which means you will pay this fee out of pocket without the option of financing it through the loan balance.To accurately assess the financial impact of these loans, calculations such as monthly payment amounts, total interest paid, and the total cost of the loans, including the upfront fees, must be calculated using proper financial formulas or mortgage calculators. Detailed understanding of these elements can aid in making an informed decision on whether to proceed with purchasing a home under these financial terms.