Financial planning cases 7-1 The Johnsons' Credit Questions They are considering trading their car in for a newer used vehicle so that Harry can have dependable transportation for commuting to work. The couple still owes $5,310 to the credit union for their current car, or $295 per month for the remaining 18 months of the 48-month loan. The trade-In value of this car plus $1,000 that Harry earned from a freelance interior design job should allow the couple to pay off the auto loan and leave $1,100 for a down payment on the newer car. The Johnsons have agreed on a sales price for the newer car of $16,000. The money planned for tires will be spent for other incidental taxes and fees associated with the purchase. a. Make recommendations to Harry and Belinda regarding where to seek financing and what APR to expect The input in the box below will not be graded, but may be reviewed and considered by your instructor blank b. Using the Garman/Forgue companion website or the information in Table 7-2, calculate the monthly payment for a loan period of three, four, five, and six years at 7 percent APR. Round your answers to the nearest cent. Round Monthly Installment Payment for a Loan in intermediate calculations to the nearest cent. For a 3-year loan: $ For a 4-year loan: $ For a 5-year loan: $ For a 6-year loan: $ Describe the relationship between the loan period and the payment amount f The input in the box below will not be graded but may be reviewed and considered by your instructor Table 7-2 Monthly Installment Payments for a Loan (Principal and Interest Required to Repay $1,000*) 000 Number of Monthly Payments APR* 12 24 36 48 60 72 84 $85.61 $43.87 $29.97 $23.03 $18.87 $16.10 $14.13 6 86.07 44.32 3 0.42 23.49 19.33 16.57 14.61 44.77 30.88 23.95 19.80 17.05 15.09 86.99 45.23 3 1.34 24.41 20.28 17.53 15.59 87.45 45.68 31.80 24.88 20.76 18.03 16.09 87.92 46.14 3 2.27 25.36 21.25 18.53 16.60 88.38 46.61 32.74 25.85 21.74 19.03 17.12 88.85 47.07 33.21 26.33 22.24 19.55 17.65 89.32 47.54 33.69 26.83 22.75 20.07 18.19 89.79 48.01 34.18 27.33 23.27 20.61 18.74 90.26 48.49 34.67 27.83 23.79 21.14 19.27 90.73 48.96 35.16 28.34 24.32 21.69 19.86 17 91.20 49.44 35.65 28.85 24.85 22.25 20.44 91.68 49.92 36.15 29.37 25.39 22.81 21.02 19 9 2.16 50.41 36.66 29.90 25.94 23.38 21.61 92.63 50.90 37.16 30.43 26.49 23.95 22.21 To illustrate, assume an automobile loan of $14,000 at 8 percent for five years. To repay 51,000, the monthly payment is $20.28; therefore, multiply $20.28 (8% row and 60-month column) by 14 to give a monthly payment of $283.92. For amounts other than exact 51,000 increments, simply use decimals. For example, for a loan of $14.500, the multiplier would be 14.5. number APR payments. For example, the payment for 48 months at 9.5 percent is 525.12 (525.36 - 524.88 = 50.48, $0.48/2 -- 50.24; $0.24 + $24.88 - $25.12). Table 3-6 2018 Unfinished Annual Budget Estimates for Harry and Belinda Johnson Jan Feb Mar Apr May June July Aug. Sept. Oct Nov Dec Yearly Total Monthly Averages 4,080 4,080 4,080 6,400 6,400 6,400 30 30 30 0 0 0 10,510 10,510 10,510 4,080 6,400 30 0 10,510 4,080 6,400 30 0 10,510 4,080 6,400 30 0 10,510 4.0804,080 6,400 6,400 30 30 0 3,000 10,510 13,510 4,080 6,400 30 0 10,510 4,080 6,400 30 0 10,510 4,080 6,400 30 0 10,510 4,080 6,400 30 0 10,510 48,960 76,800 360 3,000 129,120 4,080.00 6,400.00 30.00 250.00 10,760.00 1,600 1,600 1,600 1,700 1,700 1,600 300 20 1,700 350 20 1,600 300 20 0 0 0 1,700 350 20 500 20 1,700 350 20 500 0 0 0 500 0 220 o INCOME Harry's salary Belinda's salary Interest Income from trust TOTAL INCOME EXPENSES Fixed Expenses Rent Health insurance Life insurance Home purchase fund Renter's insurance Automobile insurance Auto loan payments Student loan payments Savings/emergencies Harry's retirement plan Belinda's retirement plan Cable TV and Internet Federal income taxes State income taxes Social security taxes Automobile registration Total fixed expenses Variable Expenses Savings money market Revolving savings fund Food (home) Food (out) 1,700 350 20 500 0 600 490 300 0 490 490 490 490 300 300 100 195 300 100 300 100 100 19,800 3,900 240 2,500 220 1,200 5,880 3,600 1,200 2,340 4,800 1.920 20,400 6,000 9,600 300 83,900 1,650.00 325.00 20.00 208.33 18.33 100.00 490.00 300.00 100.00 195.00 400.00 160.00 1,700.00 500.00 800.00 25.00 6,991.67 195 300 100 195 400 160 1.700 500 195 195 400 800 400 400 400 160 400 160 1,700 160 400 160 1.700 500 160 1,700 400 160 1.700 1,700 700 1,700 500 1,700 500 BOO 160 1.700 500 800 500 500 195 400 160 1.700 500 800 0 7,815 400 160 1.700 500 800 00 7,515 SOD 800 800 800 800 800 300 6,565 6,565 6,565 6,565 6,565 7.165 6,715 7.435 7,215 7,215 0 250 550 300 0 250 550 300 210 550 300 250 550 300 0 1900 550 550 300 300 400 3,000 2400 550 550 300 300 0 0 200190 550 550 300 300 0 0 550 300 0 0 550 300 3.400 1.780 6,600 3,600 283.33 148.33 550.00 300.00 550 550 550 550 300 550 300 550 300 220 550 300 220 550 300 220 110 550 300 220 220 110 550 300 220 110 220 100 6,600 3,600 2,640 1,320 2,640 1,200 550.00 300.00 220.00 110.00 220.00 100.00 110 220 100 220 100 170 100 300 Food (home) Food (out) Utilities Cell phones Auto gas repairs Doctor/dentist out-of-pocket Medicines Clothing and upkeep Church and charity Gifts Public transportation Personal allowances Entertainment European vacation Summer vacation Anniversary dinner party Miscellaneous Total variable expenses TOTAL EXPENSES Difference (available for spending, saving, investing, and donating Revolving savings withdrawals 720 2,040 1.160 1,475 1,920 6,000 1,800 3,600 1.200 500 1,200 44,795 60.00 170.00 96.67 122.92 160.00 500.00 150.00 300.00 100.00 41.67 100.00 3.732.92 400 200 42 100 3,712 100 100 3,712 200 0 40 100 3,280 100 3,702 42 100 3,342 100 3,712 42 100 3,742 40 100 3,380 100 100 6,0423,242 3,707 3,222 10.277 10,277 10,267 233 233 243 10,272 238 10,277 10,507 233 3 10,457 5 3 13,477 33 10.457 53 10,437 7 3 10,895 -385 11,095 -585 128,695 425 10,724.58 0 0 0 0 0 0 0 0 0 0 385 585 0 Table 3-7 Cash-Flow Calendar for Harry and Belinda Johnson Surplus/ Deficit (1-2) $233 233 243 238 Month January February March April May June July August September October November December Total Estimated Income $ 10,510 10,510 10,510 10,510 10,510 10,510 10,510 13,510 10,510 10,510 10,510 10,510 $129,120 2 Estimated Expenses $ 10,277 $ 10,277 10,267 10,272 10,277 10,507 10,457 13,477 10,457 10,437 10,895 11,095 S128,695 Cumulative Surplus/Deficit $ 233 $ 466 $ 709 $ 947 $1,180 $1,183 $1,236 $1,269 $1.322 $1,395 $1,010 $425 73 -385 -585 $425 eBook Financial planning cases 9-1 The Johnsons Decide to Buy a Home Belinda Johnson's parents and maternal grandmother have combined their finances and presented Harry and Belinda with $50,000 cash gift to use to purchase a home. The Johnsons have shopped and found a house in a new housing development that they like very much. They could either borrow from the developer or obtain a loan from one of three other mortgage lenders. The financial alternatives and data for the home are sumiiartzed in the table below. Financing Details on a Home Available to the Johnsons Price: $290,000. Developer A will finance the purchase with a 15 percent down payment and a 30-year, 4.5 percent ARM loan with 2 interest points. The initial monthly payment for principal and interest is $1,248.98 ($246,500 loan after the down payment is made: 246.5 x $5.06685). After one year the rate rises to 5 percent, with a principal plus interest payment of $1,323 27. At that point, the rate can go up or down as much as 2 percent per year, depending on the cost of an index of mortgage funds. There is an interest-rate cap of 5 percent over the life of the loan. Taxes are estimated to be about $3,800, and the homeowner's insurance premium should be about $1,800 annually. A mortgage Insurance premium of $88 per month must be paid monthly on the two 15 percent down options Loan term and type Home: Price, $290,000; Taxes, $3,800; Insurance, $1,800 Developer A Lender 1 Lender 2 30-year ARM 30-year Con 15-year Con 45% 5.0% 55% $ 43,500 $ 87,000 $ 87,000 246,500 203,000 203,000 Interest rate Down payment Lender 3 20-year Ren 5.0% $ 43,500 246,500 3 1.626.79 Loan amount Points 1.658.68 1 248.98 1.089.75 Lender 1 30-year Con2 Loan term and type Interest rate Down payment Developer A 30-year ARM! 4.5% $ 43,500 246,500 5.0% Lender 2 15 year Con 5.5% $87,000 203,000 Lender 3 20-year Ren 5.0% $ 43,500 246,500 $ 87,000 203,000 Loan amount Points 1,248.98 1,089.75 1,658.68 1,626.79 Principal and interest payment PMI Adjustable-rate mortgage. 2 Conventional Renegotiable every five years. a. Which plan has the lowest total up front costs? Developer A The highest? Lender 1 - b. What would be the full monthly payment for PITI and PMI for each of the options? Round your answers to the nearest cent Leave no cells blank Entero wherever required Developer A Lender 1 Lender 2 Lender 3 PITI payment s 2 $ 5.5 * $ 0 $ ~ PMI payment sa so so sbau FILES RUBRIC b. What would be the full monthly payment for PITI and PMI for each of the options? Round your answers to the nearest cent. Leave no cells blank. Enter wherever required Developer A Lender 1 Lender 2 Lender 3 PITI payment PMI payment $ 88 so so se c. If the Johnsons had enough additional cash to make the 30 percent down payment, would you recommend lender 1 or lender 2? 2 5.5 x Lender 1 Why? The input in the box below will not be graded but may be reviewed and considered by your instructor blank d. Assuming that the Johnsons will need about $3,000 for moving costs (in addition to closing costs), which financing option would you recommend? Why? The input in the box below will not be graded, but may be reviewed and considered by your instructor blank Financial planning cases 7-1 The Johnsons' Credit Questions They are considering trading their car in for a newer used vehicle so that Harry can have dependable transportation for commuting to work. The couple still owes $5,310 to the credit union for their current car, or $295 per month for the remaining 18 months of the 48-month loan. The trade-In value of this car plus $1,000 that Harry earned from a freelance interior design job should allow the couple to pay off the auto loan and leave $1,100 for a down payment on the newer car. The Johnsons have agreed on a sales price for the newer car of $16,000. The money planned for tires will be spent for other incidental taxes and fees associated with the purchase. a. Make recommendations to Harry and Belinda regarding where to seek financing and what APR to expect The input in the box below will not be graded, but may be reviewed and considered by your instructor blank b. Using the Garman/Forgue companion website or the information in Table 7-2, calculate the monthly payment for a loan period of three, four, five, and six years at 7 percent APR. Round your answers to the nearest cent. Round Monthly Installment Payment for a Loan in intermediate calculations to the nearest cent. For a 3-year loan: $ For a 4-year loan: $ For a 5-year loan: $ For a 6-year loan: $ Describe the relationship between the loan period and the payment amount f The input in the box below will not be graded but may be reviewed and considered by your instructor Table 7-2 Monthly Installment Payments for a Loan (Principal and Interest Required to Repay $1,000*) 000 Number of Monthly Payments APR* 12 24 36 48 60 72 84 $85.61 $43.87 $29.97 $23.03 $18.87 $16.10 $14.13 6 86.07 44.32 3 0.42 23.49 19.33 16.57 14.61 44.77 30.88 23.95 19.80 17.05 15.09 86.99 45.23 3 1.34 24.41 20.28 17.53 15.59 87.45 45.68 31.80 24.88 20.76 18.03 16.09 87.92 46.14 3 2.27 25.36 21.25 18.53 16.60 88.38 46.61 32.74 25.85 21.74 19.03 17.12 88.85 47.07 33.21 26.33 22.24 19.55 17.65 89.32 47.54 33.69 26.83 22.75 20.07 18.19 89.79 48.01 34.18 27.33 23.27 20.61 18.74 90.26 48.49 34.67 27.83 23.79 21.14 19.27 90.73 48.96 35.16 28.34 24.32 21.69 19.86 17 91.20 49.44 35.65 28.85 24.85 22.25 20.44 91.68 49.92 36.15 29.37 25.39 22.81 21.02 19 9 2.16 50.41 36.66 29.90 25.94 23.38 21.61 92.63 50.90 37.16 30.43 26.49 23.95 22.21 To illustrate, assume an automobile loan of $14,000 at 8 percent for five years. To repay 51,000, the monthly payment is $20.28; therefore, multiply $20.28 (8% row and 60-month column) by 14 to give a monthly payment of $283.92. For amounts other than exact 51,000 increments, simply use decimals. For example, for a loan of $14.500, the multiplier would be 14.5. number APR payments. For example, the payment for 48 months at 9.5 percent is 525.12 (525.36 - 524.88 = 50.48, $0.48/2 -- 50.24; $0.24 + $24.88 - $25.12). Table 3-6 2018 Unfinished Annual Budget Estimates for Harry and Belinda Johnson Jan Feb Mar Apr May June July Aug. Sept. Oct Nov Dec Yearly Total Monthly Averages 4,080 4,080 4,080 6,400 6,400 6,400 30 30 30 0 0 0 10,510 10,510 10,510 4,080 6,400 30 0 10,510 4,080 6,400 30 0 10,510 4,080 6,400 30 0 10,510 4.0804,080 6,400 6,400 30 30 0 3,000 10,510 13,510 4,080 6,400 30 0 10,510 4,080 6,400 30 0 10,510 4,080 6,400 30 0 10,510 4,080 6,400 30 0 10,510 48,960 76,800 360 3,000 129,120 4,080.00 6,400.00 30.00 250.00 10,760.00 1,600 1,600 1,600 1,700 1,700 1,600 300 20 1,700 350 20 1,600 300 20 0 0 0 1,700 350 20 500 20 1,700 350 20 500 0 0 0 500 0 220 o INCOME Harry's salary Belinda's salary Interest Income from trust TOTAL INCOME EXPENSES Fixed Expenses Rent Health insurance Life insurance Home purchase fund Renter's insurance Automobile insurance Auto loan payments Student loan payments Savings/emergencies Harry's retirement plan Belinda's retirement plan Cable TV and Internet Federal income taxes State income taxes Social security taxes Automobile registration Total fixed expenses Variable Expenses Savings money market Revolving savings fund Food (home) Food (out) 1,700 350 20 500 0 600 490 300 0 490 490 490 490 300 300 100 195 300 100 300 100 100 19,800 3,900 240 2,500 220 1,200 5,880 3,600 1,200 2,340 4,800 1.920 20,400 6,000 9,600 300 83,900 1,650.00 325.00 20.00 208.33 18.33 100.00 490.00 300.00 100.00 195.00 400.00 160.00 1,700.00 500.00 800.00 25.00 6,991.67 195 300 100 195 400 160 1.700 500 195 195 400 800 400 400 400 160 400 160 1,700 160 400 160 1.700 500 160 1,700 400 160 1.700 1,700 700 1,700 500 1,700 500 BOO 160 1.700 500 800 500 500 195 400 160 1.700 500 800 0 7,815 400 160 1.700 500 800 00 7,515 SOD 800 800 800 800 800 300 6,565 6,565 6,565 6,565 6,565 7.165 6,715 7.435 7,215 7,215 0 250 550 300 0 250 550 300 210 550 300 250 550 300 0 1900 550 550 300 300 400 3,000 2400 550 550 300 300 0 0 200190 550 550 300 300 0 0 550 300 0 0 550 300 3.400 1.780 6,600 3,600 283.33 148.33 550.00 300.00 550 550 550 550 300 550 300 550 300 220 550 300 220 550 300 220 110 550 300 220 220 110 550 300 220 110 220 100 6,600 3,600 2,640 1,320 2,640 1,200 550.00 300.00 220.00 110.00 220.00 100.00 110 220 100 220 100 170 100 300 Food (home) Food (out) Utilities Cell phones Auto gas repairs Doctor/dentist out-of-pocket Medicines Clothing and upkeep Church and charity Gifts Public transportation Personal allowances Entertainment European vacation Summer vacation Anniversary dinner party Miscellaneous Total variable expenses TOTAL EXPENSES Difference (available for spending, saving, investing, and donating Revolving savings withdrawals 720 2,040 1.160 1,475 1,920 6,000 1,800 3,600 1.200 500 1,200 44,795 60.00 170.00 96.67 122.92 160.00 500.00 150.00 300.00 100.00 41.67 100.00 3.732.92 400 200 42 100 3,712 100 100 3,712 200 0 40 100 3,280 100 3,702 42 100 3,342 100 3,712 42 100 3,742 40 100 3,380 100 100 6,0423,242 3,707 3,222 10.277 10,277 10,267 233 233 243 10,272 238 10,277 10,507 233 3 10,457 5 3 13,477 33 10.457 53 10,437 7 3 10,895 -385 11,095 -585 128,695 425 10,724.58 0 0 0 0 0 0 0 0 0 0 385 585 0 Table 3-7 Cash-Flow Calendar for Harry and Belinda Johnson Surplus/ Deficit (1-2) $233 233 243 238 Month January February March April May June July August September October November December Total Estimated Income $ 10,510 10,510 10,510 10,510 10,510 10,510 10,510 13,510 10,510 10,510 10,510 10,510 $129,120 2 Estimated Expenses $ 10,277 $ 10,277 10,267 10,272 10,277 10,507 10,457 13,477 10,457 10,437 10,895 11,095 S128,695 Cumulative Surplus/Deficit $ 233 $ 466 $ 709 $ 947 $1,180 $1,183 $1,236 $1,269 $1.322 $1,395 $1,010 $425 73 -385 -585 $425 eBook Financial planning cases 9-1 The Johnsons Decide to Buy a Home Belinda Johnson's parents and maternal grandmother have combined their finances and presented Harry and Belinda with $50,000 cash gift to use to purchase a home. The Johnsons have shopped and found a house in a new housing development that they like very much. They could either borrow from the developer or obtain a loan from one of three other mortgage lenders. The financial alternatives and data for the home are sumiiartzed in the table below. Financing Details on a Home Available to the Johnsons Price: $290,000. Developer A will finance the purchase with a 15 percent down payment and a 30-year, 4.5 percent ARM loan with 2 interest points. The initial monthly payment for principal and interest is $1,248.98 ($246,500 loan after the down payment is made: 246.5 x $5.06685). After one year the rate rises to 5 percent, with a principal plus interest payment of $1,323 27. At that point, the rate can go up or down as much as 2 percent per year, depending on the cost of an index of mortgage funds. There is an interest-rate cap of 5 percent over the life of the loan. Taxes are estimated to be about $3,800, and the homeowner's insurance premium should be about $1,800 annually. A mortgage Insurance premium of $88 per month must be paid monthly on the two 15 percent down options Loan term and type Home: Price, $290,000; Taxes, $3,800; Insurance, $1,800 Developer A Lender 1 Lender 2 30-year ARM 30-year Con 15-year Con 45% 5.0% 55% $ 43,500 $ 87,000 $ 87,000 246,500 203,000 203,000 Interest rate Down payment Lender 3 20-year Ren 5.0% $ 43,500 246,500 3 1.626.79 Loan amount Points 1.658.68 1 248.98 1.089.75 Lender 1 30-year Con2 Loan term and type Interest rate Down payment Developer A 30-year ARM! 4.5% $ 43,500 246,500 5.0% Lender 2 15 year Con 5.5% $87,000 203,000 Lender 3 20-year Ren 5.0% $ 43,500 246,500 $ 87,000 203,000 Loan amount Points 1,248.98 1,089.75 1,658.68 1,626.79 Principal and interest payment PMI Adjustable-rate mortgage. 2 Conventional Renegotiable every five years. a. Which plan has the lowest total up front costs? Developer A The highest? Lender 1 - b. What would be the full monthly payment for PITI and PMI for each of the options? Round your answers to the nearest cent Leave no cells blank Entero wherever required Developer A Lender 1 Lender 2 Lender 3 PITI payment s 2 $ 5.5 * $ 0 $ ~ PMI payment sa so so sbau FILES RUBRIC b. What would be the full monthly payment for PITI and PMI for each of the options? Round your answers to the nearest cent. Leave no cells blank. Enter wherever required Developer A Lender 1 Lender 2 Lender 3 PITI payment PMI payment $ 88 so so se c. If the Johnsons had enough additional cash to make the 30 percent down payment, would you recommend lender 1 or lender 2? 2 5.5 x Lender 1 Why? The input in the box below will not be graded but may be reviewed and considered by your instructor blank d. Assuming that the Johnsons will need about $3,000 for moving costs (in addition to closing costs), which financing option would you recommend? Why? The input in the box below will not be graded, but may be reviewed and considered by your instructor blank
