# FIN 115 Chapter 9 FINANCIAL PLANNING PROBLEMS _p by sofiaie

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```									FIN 115 Chapter 9: FINANCIAL PLANNING PROBLEMS (p. 299)

1. What type of housing would you suggest for people in the following life situations?
a. A single parent with two school-age children
b. A two-income couple without children
c. A person with both dependent children and a dependent parent
d. A couple near retirement with grown children
While answers may vary, suggested responses may be found in Exhibit 9-1 (p. 272).
2. Based on the following data, would you recommend buying or renting?
Rental Costs                      Buying Costs
Annual rent, \$7,380               Annual mortgage payments, \$9,800
(\$9,575 is interest)
Insurance, \$145                   Property taxes, \$1,780
Security deposit, \$650            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.
Rental Costs                     Buying Costs
\$7,380 Rent                       \$9,800 Mortgage payments
145 Insurance                   2,830 Taxes, insurance, maintenance
39 Interest lost on              270 Interest lost on down payment,
security deposit                  closing costs
\$7,564 Total rental costs            225 Growth in equity
1,700 Annual appreciation
2,681 Tax savings for mortgage
interest
498 Tax savings for property taxes
\$7,796 Total buying costs

3. Use the buy-versus-rent analysis on page 275 to compare two residences that you might consider.
This activity can help students understand renting vs. buying in a practical situation.
4. Estimate the affordable monthly mortgage payment, the affordable mortgage amount, and the affordable home
purchase price for the following situation (see Exhibit 9-8).
Monthly gross income, \$2,950
Down payment to be made, 15 percent of purchase price
Other debt (monthly payment), \$160
Monthly estimate for property taxes and insurance, \$210
30-year loan at 8 percent.
Based on example A (with other debts), Exhibit 9-8 (p. 297)
Affordable monthly mortgage payment, \$751
Affordable mortgage amount, \$102,316
Affordable home purchase, \$120,372
5. Based on Exhibit 9-9, what would be the monthly mortgage payments for each of the following situations?
a. A \$40,000, 15-year loan at 11.5 percent.
b. A \$76,000, 30-year loan at 9 percent.
c. A \$65,000, 20-year loan at 10 percent.
What relationship exists between the length of the loan and the monthly payment? How does the mortgage rate affect
the monthly payment?
a. \$11.68  40 = \$467.20
b. \$ 8.05  76 = \$611.80
c. \$ 9.65  65 = \$627.25
Longer mortgage terms mean a lower monthly payment. As rates increase, a higher monthly payment is required.
6. Which mortgage would result in higher total payments?
Mortgage A: \$985 a month for 30 years, or
Mortgage B: \$780 a month for 5 years, and \$1,056 for 25 years
A: \$985  360 months = \$354,600
B: (\$780  60 months) + (\$1,065  300 months) = \$366,300
7. Kelly and Tim Jones plan to refinance their mortgage to obtain a lower interest rate. They will reduce their mortgage
payments by \$56 a month. Their closing costs for refinancing will be \$1,670. How long will it take them to recover
the cost of refinancing?
\$1,670  \$56 = 29.82 (about 30 months; two and a half years)
8. You estimate that you can save \$3,800 by selling your own home rather than using a real estate agent. What would be
the future value of that amount if invested for five years at seven percent?
\$3,800  1.403 = \$5,331.40

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