C.J. Smith has decided to buy a house in the tony suburb of Decatur. To both impress his friends and to save a little bit of money on his energy bills, he has decided to buy an EarthCraft home, which automatically qualifies him for an energy-efficient mortgage that will give him a 2 percent stretch on his qualifying ratio. In other words, instead of the normal 28% limit imposed on him by the Fannie Mae/ Freddie Mac front end ratio, he can now get a mortgage at 30% of his gross income. The rationale for the bank allowing this is that he will save so much in energy costs in an EarthCraft home that this will free up more money for him to spend on his home mortgage.

Assume that he has a household income of $95,000 and his lender requires a down payment of 20% for a 30-year loan. The interest rate is 5%. He has his eye on a sweet looking home currently priced at $450,000. Please answer the following questions below.

2) Can he buy this home with the 2% stretch? Please show your work and explain why.

3) Assume for the moment that he has two options for housing. The first option allows him to get a home exactly at the Freddie/Fannie limit with monthly utility bills of $220. The second option allows him to get exactly at the 2% stretch but his utility bills fall to $50. Which one is best for him? By how much? Please show your work.

4.) Now assume that C.J. chooses the non-energy efficient home listed above. He determines that he wants to make a $10,000 E-E improvement to the property, which will drive his monthly utility bills down to $60/month. What is the payback period for this particular investment? What will be the net benefit after five years?