1) Patricia has been renting a two bedroom house for years. She pays $1000 per month in rent for the apartment and $400 per year in property and liability insurance. The owner of the house wants to sell it, and Patricia is considering making an offer. The owner wants $180,000 for the property, but Patricia thinks she could get the house for $170,000 and use her $20,000 in 3% CDs that are ready to mature for the down payment. Patricia has talked to her bank and could get a 4.5% mortgage loan for 30 years to finance the remainder of the purchase price. Property taxes on the house are $2000 per year. Insurance would need to be upgraded to $900 a year and Patricia would incur about $1000 in costs the first year for maintenance. Property values are increasing at about 2% per year in the neighborhood. Patricia is in the 25% marginal tax bracket. A) Use Table 9-4 to calculate the monthly mortgage payment for the mortgage loan. B) Use the Run the Numbers worksheet on page 264 to determine whether Patricia should continue renting or would she be better off buying the home. For any numbers not included in the scenario but are on the worksheet just leave blank. for a CHAPTER 9 Obta nar nes Table 9.4 Estimating Mortgage Loan Payments for Principal and Interest (Monthly Payment per $1,000 Borrowed) 25 Interest Rate (%) 3.0 3.5 4.0 4.5 5.0 Payment Period (Years) 15 20 30 $6.9058 $5.5460 $4.7421 7.1488 $4.2160 5.7996 5.0062 4.4904 7.3969 6.0598 5.2783 4.7742 7.6499 6.3265 5.5583 5.0669 7.9079 6.5996 5.8459 5.3682 8.1708 6.8789 6.1409 5.6779 8.4386 7.1643 6.4430 5.9955 8.7111 7.4557 6.7521 6.3207 8.9883 7.7530 7.0678 6.6530 7.5 9.2701 8.0559 7.3899 6.9921 8.0 9.5565 8.3644 7.7182 7.3376 appropriate figure in the table for the interest rate and time period of the loan. For example, a $160,000 loan for 30 years More To use this table to figure a monthly mortgage payment, divide the amount borrowed by 1,000 and multiply by the at 60 percent would require a payment of $959,280 ($160,000 + 1,000) X 5.9955]: over 20 years, it would require a payment of $1,146.29 [($160,000 + 1,000) X 7.1643). For calculations for different interest rates, visit the Garman/Forgue 5.5 6.0 6.5 7.0 companion website. 264 PART 2 Money Management an pas RUN THE NUMBERS India 19 2 will put the financial picture into focus. A similar worksheet can be found at www.finance.yahoo.com/calculator/ real-estate/hom06. DORT INCLUS Should You Buy or Rent? This worksheet can be used to estimate whether you would be better off renting housing or buying. If you are renting an apartment and planning to buy a house, qualita- tive differences will enter into your decision. This worksheet Your Figures Rent Buy Example Amounts Rent Buy $10,360 $12,000 NA 360 NA 0 0 0 720 725 0 3,000 600 1,800 N/A N/A $16,485 $11,640 NA Annual Cash-Flow Considerations Annual rent ($1,000/month) or mortgage payments (5863, 35/month) Property and liability insurance Private mortgage insurance Real estate taxes Maintenance Other housing fees Less interest earned on funds not used for down payment (at 2%) Cash-Flow Cost for the Year Tax and Appreciation Considerations Less principal repaid on the mortgage loan Plus tax on interest earned on funds not used for down payment (25% marginal tax bracket) Less tax savings due to deductibility of mortgage interest' (25% marginal tax bracket) Less tax savings due to deductibility of real estate property taxes (25% marginal tax bracket) Less appreciation on the dwelling (2.5% annual rate) Net Cost for the Year 1,768 NA NA 180 113 I 1 I || N/A NA 2,148 N/A NA 750 NA N/A NA $11,820 1,800 $10,019 Calculated from Table 9-4 on page 285 "Calculated according to the method illustrated in Table 9-2 on page 283 "Mortgage interest tax savings equal total mortgage payments minus principal repaid multipled by the marginal tax rate