1. Adam and Laura Jensen of Atlanta, Georgia, both of whom are in their late 20s, currently are renting an unfurnished two-bedroom apartment for $880 per month, plus $130 for utilities and $34 for insurance. They have found a condominium they can buy for $170,000 with a 20 percent down payment and a 30-year, 5 percent mortgage. Principal and interest payments are estimated at $730 per month, with property taxes amounting to $150 per month and a home-owner’s insurance premium of $720 per year. Closing costs are estimated at $3200. The monthly homeowners association fee is $275, and utility costs are estimated at $160 per month. The Jensens have a combined income of $57,000 per year, with take-home pay of $4100 per month. They are in the 15 percent tax bracket, pay $225 per month on an installment loan (ten payments left), and have $39,000 in savings and investments out-side of their retirement accounts.

(a) Can the Jensens afford to buy the condo? Use the results from the Garman/Forgue companion website or the information on page 264 to support your answer. Also, consider the effect of the purchase on their savings and monthly budget.

(b) Adam and Laura think that their monthly housing costs would be lower the first year if they bought the condo. Do you agree? Support your answer. Assume that they currently have $10,000 in tax deductible expenses.

(c) If they buy, how much will Adam and Laura have left in savings to pay for moving expenses?

(d) Available financial information suggests that mortgage rates might increase over the next few months. If the Jensens wait until the rates increase 1 more percent, how much more will they spend on their monthly mortgage payment? Use the information in Table 9-4 or the Garman/Forgue companion website to calculate the payment.

2. Seth and Alexandra Moore of Berrien Spring, Michigan have an annual income of $78,000 and want to buy a home. Currently, mortgage rates are 6 percent. The Moores want to take out a mortgage for 30 years. Real estate taxes are estimated to be $4800 per year for homes similar to what they would like to buy, and homeowner’s insurance would be about $1500 per year.

(a) Using a 28 percent front-end ratio, what are the total annual and monthly expenditures for which they would qualify?

(b) Using a 36 percent back-end ratio, what monthly mortgage payment (including taxes and insurance) could they afford given that they have an automobile loan payment of $470, a student loan payment of $350, and credit card payments of $250?

(c) If mortgage interest rates are around 5 percent and the Moores want a 30-year mortgage, use the information in the Did You Know box on page 264 to estimate how much they could borrow given your answer to part a.

3. Alex Guadet of Forrest City, Arkansas, has been renting a small, two-bedroom house for several years. He pays $900 per month in rent for the home and $300 per year in property and liability insurance. The owner of the house wants to sell it, and Phillip is considering making an offer. The owner wants $130,000 for the property, but Phillip thinks he could get the house for $125,000 and use his $25,000 in 3 percent certificates of deposit that are ready to mature for the down payment. Alex has talked to his banker and could get a 5.5 percent mortgage loan for 25 years to finance the remainder of the purchase price. The banker advised Alex that he would reduce his debt principal by $2200 during the first year of the loan. Property taxes on the house are $1800 per year. Phillip estimates that he would need to upgrade his property and liability insurance to $800 per year and would incur about $1500 in costs the first year for maintenance. Property values are increasing at about 2.5 percent per year in the neighborhood. Alex is in the 25 percent marginal tax bracket.

(a) Use Table 9-4 to calculate the monthly mortgage payment for the mortgage loan that Phillip would need.

(b) How much interest would Alex pay during the first year of the loan?

(c) Use the Run the Numbers worksheet, “Should You Buy or Rent?” on page 254 to determine whether Alex would be better off buying or renting.

4. Kevin Tutumbo of Middle-town, Ohio, has owned his home for 15 years and expects to live in it for five more years. He originally borrowed $105,000 at 6 percent interest for 30 years to buy the home. He still owes $65,750 on the loan. Interest rates have since fallen to 5.0 percent, and Kevin is considering refinancing the loan for 15 years. He would have to pay 2 points on the new loan with no prepayment penalty on the current loan.

(a) What is Kevin’s current monthly payment?

(b) Calculate the monthly payment on the new loan.

(c) Advise Kevin on whether he should refinance his mortgage using the Run the Numbers worksheet, “When You Should Refinance Your Mortgage” on page 278.

5. Heather McIntosh of DeKalb, Illinois, recently purchased a home for $165,000. She put $25,000 down and took out a 25-year loan at 5.4 percent interest.

(a) Use Table 9-4 to determine her monthly payment.

(b) How much of her first payment will go toward interest and principal and how much will she owe after that first month?

(c) How much will she owe after three months.