PERSONAL FINANCE BUSG 1370
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PERSONAL FINANCE BUSG 1370
Part 2: Managing Your Money Chapter 7: Using Consumer Loans: The Role of Planned Borrowing
Chapter 8: The Home and Automobile Decision
YOU MUST SHOW YOUR WORK. Just answering the question without showing the math/finance path will be counted as ZERO (0); even if you have the answer correct – you MUST show the mathematical path for getting to the answer.
3-Page Assignments Each Assignment will have atleast >3 Pages
• Page 1 = Cover • Page 2 = Assignments • Page 3 = Reference (textbook + >2)
Read Pages 282-285 Be a Financial Planner–Continuing Case: Cory and Tisha Dumont
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The continuing case of Cory and Tisha Dumont gives students the opportunity to synthesize and integrate the many different financial concepts that are presented in the five parts of this text. By observing the progression of this case, students are encouraged to:
• Analyze a changing financial situation • Construct financial statements • Calculate taxes • Measure risk exposure • Develop a financial plan
Page 282-285, Answer the following questions:
20. Cory and Tisha found a used car that costs $12,000. They can finance through their bank for 8.75 percent interest for a maximum of 48 months. The rate for new car financing is 7.50 percent for 60 months or 7.35 percent for 48 months. If they could find a comparably priced new vehicle, how much would they save per month in interest charges if they finance the vehicle for 48 months? 21. Considering the information in question 20, how much interest would be saved if the Dumonts financed the used vehicle for 36 months, instead of 48 months, if the rate remains the same? 25. Based on their gross monthly income of $7,000 and monthly debt repayments of $911, what is the maximum mortgage amount for which Cory and Tisha could currently qualify? Monthly real estate tax (T) and homeowners insurance (I) are estimated at $170 per month. Calculate the mortgage amount using both the 28 percent qualification rule and the 36 percent qualification rule. (Hint: Refer to Figure 8.7 or use Worksheet 11 (next page.) Use 7 percent as the current rate of interest and assume a 30-year, fixed-rate mortgage. 27. Compare the Dumonts’ monthly mortgage payment for PITI in question 25 with their current monthly rent and renter’s insurance cost of $1,300. Should Cory and Tisha consider purchasing a house that would require their maximum qualification mortgage loan amount? Defend your answer. 28. Given the maximum mortgage qualification amount determined in question 25, calculate a 20 percent down payment. If closing costs average 5 percent of the cost of the house, how much will they need on the day of closing? How does this compare with the $13,000 in the stock market index mutual fund account for their house down payment? 29. Using the monthly PI payment for the maximum mortgage qualification amount in question 25, calculate the total cost of the Dumonts’ home if the mortgage is not paid off early. How much of this cost is interest? 30. Tisha would like to consider a 15-year mortgage so that the house would be paid for before Haley enters college. Explain how the factors of monthly payment, total interest paid, time value of money, and the effect of taxes impact this decision.
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W 11 WORKSHEET
Method 1 Determine Your Maximum Monthly Mortgage Payment Using the Ability to Pay, PITI Ratio.
a. Monthly income (annual income divided by 12) $7,000 b. Times 0.28: Percentage of PITI (Principal, interest, taxes, and insurance) to your
monthly gross income that lenders will lend in the form of a mortgage loan
(multiply line a by 0.28) x 0.28 = $1,960 c. Less: Estimated monthly real estate tax and insurance payments - $170 d. Equals: Your maximum monthly mortgage payment using the 28% of PITI ratio = $1,790
To Determine the Maximum Mortgage Loan Level Using the Maximum Monthly
Mortgage Payments as Determined Using the PITI Ratio (line d): Step 1: Monthly mortgage payment for a $10,000 mortgage with a ____ year
maturity and a ____% interest rate (using Table 8.1) = 66.53 Step 2: Maximum mortgage level = maximum monthly mortgage payment (line d)
divided by the monthly mortgage payment on a $10,000, ____%, ____year mortgage (step 1 above) times $10,000 = (line d/step 1) x $10,000 = $269,052
Method 2 Determine Your Maximum Monthly Mortgage Payment Using the Ability to Pay, PITI Plus oth Fixed Monthly Payments, Ratio.
e. Monthly income (annual income divided by 12) $7,000 f. Times 0.36: Percentage of PITI + current monthly fixed payments to your
monthly gross income that lenders will lend in the form of a mortgage loan
(multiply line a by 0.36) x 0.36 = $2,520 g. Less: Current nonmortgage debt payments on debt that will take over
10 months to pay off and other monhtly legal obligations such as child support
and allimony payments - $911 h. Less: Estimated monthly real estate tax and insurance payments - $170 i. Equals: Your maximum monthly mortgage payment using the 36% of PITI + other fixed
Monthly payments ratio (line f - g - h) = $1,439 To Determine the Maximum Mortgage Loan Using the PITI Plus Other Fixed Monthly
Payments Ratio (line i): Step 1: Monthly mortgage payment for a $10,000 mortgage with a ____ year maturity and a ___ _% interest rate (using Table 8.1) = 66.53 Step 2: Maximum mortgage level = maximum monthly mortgage payment (line d) divided by the monthly mortgage payment on a $10,000, ___ _ %, ___ _year mortgage (step 1 above) times $10,000 = (lined/step 1) x $10,000 = $216,293
Method 3 Determine Your Maximum Mortgage Level Using the "80% of the Appraised Value of the House" Rule.
j. Funds availble for the down payment and closing costs k. Less: Closing costs - l. Equals: Funds available for the down payment = $0
m. Times 4: Maximum mortgage level using the "80% of the appraised value of the house" rule (the 20% down, line l, times 4 equals the 80% you can borrow) x 4 = $0
Conclusion: Maximum Mortgage Level for Which You Will Qualify
(the lowest of the amounts using method 1, method 2, or method 3) = $216,293
Worksheet for Calculating the Maximum Monthly Mortgage Payment and Mortgage Size for Which You Can Qualify