Question

The down payment is $200,000 on a house with an agreed- upon price

(and appraisal) of $1,200,000. Jumbo mortgage rates are 4.3% and conforming rates are 4%. If the conforming loan limit is $700,000 in the area, then the break even rate on a second mortgage piggy bank arrangement is_____.


5%


4.7%


4.8%


4.6%


4.9%

Answer & Explanation
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  • The break even rate on a second mortgage piggy bank arrangement is
    •  5%
Step-by-step explanation

Total Loan Amount  needed= House price - Down Payment

Total Loan Amount  needed= 1200000-200000

Total Loan Amount  needed = 1000000

 

Conforming loan limit = 700000 (given)

 

Second Mortgage Amount above Conforming loan limit  = Total Loan Amount  needed - Conforming loan limit 

Second Mortgage Amount above Conforming loan limit  = 1000000-700000

Second Mortgage Amount above Conforming loan limit  = 300000

 

Let the break even rate on Second Mortgage be r

 

At break even point both interest cost would be equal

Therefore

Total Loan Amount  needed x Jumbo mortgage rates = Conforming loan limit x Conforming rate + Second Mortgage Amount  x break even rate on Second Mortgage

1000000*4.3% =  700000*4% + 300000*r

43000 = 28000 + 300000 r

r = (43000-28000)/300000

r = 5%

 

Hence Break even rate on Second Mortgage  = 5%