Pfin (book Only)
6th Edition
ISBN: 9781337117029
Author: Billingsley, Randy; Joehnk, Michael D.; Gitman, Lawrence J.
Publisher: Cengage Learning
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Chapter 5, Problem 4FPE
Summary Introduction
To determine: The cost of each alternative.
Summary Introduction
To discuss: The recommendation of least costly option.
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Use Worksheet 5.3. Rachel and Alexander Harrison need to calculate the amount they can afford to spend on their first home. They have a comt
annual income of $67,500 and have $37,000 available for a down payment and closing costs. The Harrisons estimate that homeowner's insurance
property taxes will be $250 per month. They expect the mortgage lender to use a 30 percent (of monthly gross income) mortgage payment afford
ratio, to lend at an interest rate of 6 percent on a 30-year mortgage, and to require a 10 percent down payment. Based on this information, use th
home affordability analysis form in Worksheet 5.3 to determine the highest-priced home the Harrisons can afford. Assume that closing costs are o
of the down payment. Round the answer to the nearest dollar.
fill in the blanks using this information:
Theoretical Housing Situation:
Renting:
Monthly Rent: $1,800
Renter’s Insurance: $200 per year
Security Deposit: $2,000
After-tax Savings Rate: 5%
Buying:
Home Price: $250,000
Down Payment: $50,000
Loan Amount: $200,000
Loan Term: 25 years
Interest Rate: 3.5%
Property Taxes: 1.25% of the home price
Homeowner’s Insurance: 0.4% of the home price
Maintenance Costs: 1.5% of the home price
Closing Costs: $5,000
After-tax Rate of Return: 4%
Tax Rate: 25%
Estimated Annual Appreciation: 2%
Now, fill in the worksheet:
A. COST OF RENTING:
Annual Rental Costs (Line A.1):
12×$1,800=$21,60012×$1,800=$21,600
Renter’s Insurance (Line A.2):
$200
Opportunity Cost of Security Deposit (Line A.3):
$2,000×0.05=$100$2,000×0.05=$100
Total Cost of Renting (Line A.1 + Line A.2 + Line A.3):
$21,600+$200+$100=$21,900$21,600+$200+$100=$21,900
B. COST OF BUYING:
Annual Mortgage Payments (Line B.1):
Use a mortgage calculator to find the monthly…
fill out the worksheet using the following information:
Theoretical Housing Situation:
Renting:
Monthly Rent: $1,800
Renter’s Insurance: $200 per year
Security Deposit: $2,000
After-tax Savings Rate: 5%
Buying:
Home Price: $250,000
Down Payment: $50,000
Loan Amount: $200,000
Loan Term: 25 years
Interest Rate: 3.5%
Property Taxes: 1.25% of the home price
Homeowner’s Insurance: 0.4% of the home price
Maintenance Costs: 1.5% of the home price
Closing Costs: $5,000
After-tax Rate of Return: 4%
Tax Rate: 25%
Estimated Annual Appreciation: 2%
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