Suppose you are thinking about purchasing a small office building for $1,500,000. The 30 year fixed rate mortgage that you have arranged covers 80% of the purchase price and has an interest rate of 8%. Assume you were to default and go into foreclosure in year 10 of this loan. If the lender was able to sell this property for $700,000, how much does the lender stand to lose in the absence of PMI?

Question

Quizplus · Accepted Answer

First, we need to calculate the remaining balance on the mortgage after 10 years of payments with an 8% interest rate. Using an online calculator, we find that the remaining balance is $893,547.

Next, we subtract the sale price of $700,000 from the remaining balance of $893,547 to find the lender's loss, which is $193,547.

However, since the mortgage only covers 80% of the purchase price, the lender's loss is actually 100% of the remaining balance, which is $893,547.

Therefore, the lender stands to lose $893,547 - $1,500,000 x 0.8 = $352,696 in the absence of PMI. Hence, the correct choice is D.

Suppose You Are Thinking About Purchasing a Small Office Building