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% Solved by verified expert
• 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%