Chapter 9

Annual rent $ 7,380 Insurance 145 Security deposit 650 Annual mortgage payments $9,800 ($9,575 is interest) Property taxes 1,780 Insurance/maintenance 1,050 Down payment/closing costs 4,500 Growth in equity 225 Estimated annual appreciation 1,700 Assume an after-tax savings interest rate of 6 percent and a tax rate of 28 percent. (a) Calculate the total rental cost and total buying cost. (b) Would you recommend buying or renting?

(a)Rental Costs Buying Costs $7,380 Rent $9,800 Mortgage payments 145 Insurance 2,830 Taxes, insurance, maintenance 39 Interest lost on security deposit 270 Interest lost on down payment, closing costs -225 Growth in equity -1,700 Annual appreciation -2,681 Tax savings for mortgage interest -498 Tax savings for property taxes $ 7,564 Total rental costs $ 7,796 Total buying costs Interest lost on security deposit = $650 × 0.06 = $39 Interest lost on down payment and closing cost = $4,500 × 0.06 = $270 Tax savings for mortgage interest = $9,575 × 0.28 = $2,681 Tax savings for property taxes = $1,780 × 0.28 = $498 (b)If cost is the only decision criteria, then you should rent because the cost of renting is less than the cost of buying.

In an attempt to have funds for a down payment, Jan Carlson plans to save $3,500 a year for the next five years. With an interest rate of 3 percent, what amount will Jan have available for a down payment after the five years? Use Exhibit 1-B.

FV = $3,500 × 5.309 = $18,581.50

You estimate that you can save $3,800 by selling your home yourself rather than using a real estate agent. What would be the future value of that amount if invested for five years at 9 percent? Use Exhibit 1-A.

FV = Inital savings × Future value factor = $3,800 × 1.539 = $5,848.20

Ben and Carla Manchester plan to buy a condominium. They will obtain a $150,000, 30-year mortgage at 6 percent. Their annual property taxes are expected to be $1,800. Property insurance is $480 a year, and the condo association fee is $220 a month. Based on these items, determine the total monthly housing payment for the Manchesters. Use Exhibit 9-9.

Monthly mortgage payment: $ 900 Monthly property taxes: 150 Monthly property insurance: $ 40 Monthly association fee: 120 Total monthly housing payment: $ 1,310 Monthly mortgage payment = Mortgage factor × Mortgage amount in thousands = $6.00 × 150 = $900 Monthly property taxes = Annual taxes/12 = $1,800 / 12 = $150 Monthly property insurance = Annual property insurance / 12 = $480 / 12 = $40

Kelly and Tim Browne plan to refinance their mortgage to obtain a lower interest rate. They will reduce their mortgage payments by $83 a month. Their closing costs for refinancing will be $1,670. How long will it take them to recover the cost of refinancing?

Recovery time = Refinancing cost / Monthly savings = $1,670 / $83 = 20.1 months

Which mortgage would result in higher total payments? Mortgage A: $970 a month for 30 years Mortgage B: $760 a month for 5 years and $1,005 for 25 years

Total payments = Monthly payment × Number of months per year × Number of years Mortgage A: Total payments = $970 × 12 × 30 = $349,200 Mortgage B: Tota payments = ($760 × 12 × 5) + ($1,005 × 12 × 25) = $45,600 + $301,500 = $347,100 Mortgage A has higher total payments than Mortgage B.

Estimate the affordable monthly mortgage payment, the affordable mortgage amount, and the affordable home purchase price for the following situation. (Refer to Exhibit 9-8 and Exhibit 9-9) Monthly gross income $2,950 Down payment to be made (percent of purchase price) 15% Other debt (monthly payment) $160 Monthly estimate for property taxes and insurance $210 30-year loan 8%

With a down payment of 15 percent, lenders use 33 percent of monthly gross income as a guideline for PITI (principal, interest, taxes, and insurance) and 38 percent of monthly gross income as a guideline for PITI plus other debt payments. $2,950 ×.38 = $1,121 $2,950 ×.33 = $974 Subtract other debt payments (e.g., payments on an auto loan) and an estimate of the monthly costs of property taxes and homeowner's insurance. −160 −210 — −210 Affordable monthly mortgage payment $ 751 $ 764 Divide this amount by the monthly mortgage payment per $1,000 based on current mortgage rates—an 8 percent, 30-year loan, for example (see Exhibit 9-9)—and multiply by $1,000. ÷$ 7.34 ×$1,000 ÷$ 7.34 ×$1,000 Affordable mortgage amount $102,316 $104,087 Divide your affordable mortgage amount by 1 minus the fractional portion of your down payment (e.g., 1−.15 with a 15 percent down payment). ÷0.85 ÷0.85 Affordable home purchase $120,372 $122,455

Based on Exhibit 9-9, or using a financial calculator, what would be the monthly mortgage payments for each of the following situations? a.$40,000, 15-year loan at 4.5 percent. b.$76,000, 30-year loan at 5 percent. c. $65,000, 20-year loan at 6 percent.

a. $7.65 × 40 = $306.00 b. $5.37 × 76 = $408.12 c. $7.16 × 65 = $465.40