Home Buying Analysis
Group 1

Author Note
This report is prepared for MBA 648, Managerial Finance, taught by Professor Jake Feldman

Contents

Abstract
This project is to provide information about whether to buy or rent an apartment in New York and Shanghai. In this project, our teamwill analyses point system and the relationship between mortgage points and mortgage rate. For borrowing money, we also need to decide borrowing with an adjustable rate or fixed rate mortgage. We believe that the most important part of our project is to develop a model in order to understand what is better; to rent or to buy an apartment in NY and Shanghai. We used excel spread sheets to show our calculations. Besides, we used data for apartments because it was easy to compare it; usually people rent apartments not houses. At the end of this project, we will use our model results to decide whether to buy or to rent an apartment in New York and Shanghai.

1.Introduction The goal of our project is to provide information about: -Buying a home vs. renting (comparable space) in New York and Shanghai -Paying more points upfront and getting a lower mortgage rate or vice versa -Borrowing with an adjustable rate vs. fixed rate mortgage In order to provide accurate information we will use data from 2013 that we gathered from various sources. We tried to use more or less creditable sources for our data, such us peer reviewed articles, finance magazines and newspapers such as Forbes, NY Times etc. We believe that the most important part of our project is to develop a model in order to understand what is better; to rent or to buy an apartment in NY and Shanghai. We used excel spread sheets (p…) to show our calculations. Besides, we used data for apartments because it was easy to compare it; usually people rent apartments not houses.
Paying more points upfront and getting a lower mortgage rate or vice versa There are two types of points, origination points and discount points. The origination point is the fee borrowers pay to lenders or loan officers for evaluating, processing and approving mortgage loans. Credit history is a factor that plays a role in the amount of origination points a borrower needs to pay. Discount points are a type of prepaid interest mortgage borrowers can purchase that lowers the amount of interest they will have to pay. In our project we focus on discount points. Each discount point generally costs 1% of the total loan amount; each point lowers the interest rate by one-eighth to one-quarter of your interest rate. Discount points are tax deductible only for the year in which they were paid. For example, the effect of paying 1 point on a 30-year mortgage, or $2,000, could also be in the order of 1/4 of 1%, and you could lower your 30-year mortgage interest rate from 4.75% to 4.5%, providing approximately $25 in monthly savings. This is similar to the effect of points on a 15 year mortgage, except that a 30-year mortgage provides more time for monthly savings through the lowered interest rate. In order to decide if it is good to pay upfront points, usually people try to estimate when money would recover that was spent on point (break-even point). In our example above after paying 1 point on a 15-year or 30-year mortgage it will take 80 months to ‘break even.’ That’s $2000 upfront, divided by $25/month. In other words, if the person will live in the house less than 80 months it doesn’t make sense to pay points upfront for a lower interest rate. So is it worth it? It looks like it depends on the time a borrower desires to live in the house. Sometimes it works vice versa; the lender can offer a payment to reduce the upfront cost in exchange to a higher interest. Then it would work all the way around, meaning the longer the borrower stays in the home the worse it is for him/her. For the sake of our project let’s assume that