Suppose you are interested in obtaining a mortgage loan for $250,000 in order to purchase your principal residence. Your lender has suggested that you might be interested in taking an FHA loan. In order to do so, you must pay an additional up-front mortgage insurance premium (UFMIP) of 1.0% of the mortgage balance. If the interest rate on the fully-amortizing mortgage loan is 5% and the term is 30 years, what is your monthly mortgage payment assuming the UFMIP is financed?

Question

Quizplus · Accepted Answer

The UFMIP is 1.0% of the mortgage balance, which is $2,500. Therefore, the total loan amount is $252,500 ($250,000 + $2,500). Using the formula for a fully-amortizing mortgage, the monthly payment is:

PMT = (P * i) / (1 - (1 + i)^(-n))

where:
P = loan amount = $252,500
i = interest rate per month = 5% / 12 = 0.004167
n = total number of months = 30 years * 12 months/year = 360

PMT = ($252,500 * 0.004167) / (1 - (1 + 0.004167)^(-360))
PMT = $1,355.47

Therefore, the monthly mortgage payment is $1,355.47, which is closest to Choice B.

Suppose You Are Interested in Obtaining a Mortgage Loan for $250,000