Question

I need help with this scenario I am not sure how to answer the questions below. May you please help me.

Newlyweds Terell and Sheree have found a house they want to purchase. However, they’ll need some creative financing in order to make it work. They’ve lined up a 30-year fixed-rate loan but need to have a 10% down payment to get a good interest rate. They need to find another loan for the down payment, and Sheree has asked her dad to co-sign.Newlyweds Terell and Sheree have found a house they want to purchase. However, they’ll need some creative financing in order to make it work. They’ve lined up a 30-year fixed-rate loan but need to have a 10% down payment to get a good interest rate. They need to find another loan for the down payment, and Sheree has asked her dad to co-sign.

1. Predict possible outcomes of Terell and Sheree‘s position. Explain your predictions.

2. Is it a good idea for Sheree to ask her dad to co-sign on the loan? Why or why not?

3. Is a 30-year fixed-rate loan a good idea for Terell and Sheree? Explain your answer.

4. If you were in Terell and Sheree’s situation, what would you have done?

Answer 1

1. Based on data it shows that Terell and Sheree need to manage 2 loans a) Mortgage Loan b) Personal Loan where Sheree's father would be the co-signee. Assuming that they have good credit ratings and managed to get good interest rate but taking a fixed loan for such a long period of time (30 years) would not be a good idea as they would need to pay EMI for two loans.

2. Depending on the 10% amount of money they need to down payment, Sheree would ask her father. If the loan amount is low then Sheree can ask her dad to co-sign as in case she faces any difficulty her father would be in a position to pay the outstanding balance.

3. Taking a fixed rate loan for such a time would not be good idea. By taking fixed rate loan they won't be able to take the advantage of interest rate variability due to macroeconomic changes. When the interest rate low compared to mortgage rate then they will pay more and when interest rate is high they would pay less.

4. It would be good idea to go for floating rate loan or if they opt for fixed rate loan then they would need to make sure they have a convertible clause to change the fixed rate loan to a floating rate loan when the rate of interest is going down. They can also go for re-finance their mortgage loan with floating rate.