Fundamentals of Financial Planning (FIN 1011) Week 11 -In-Class Assignment 2 Case Study: Lam & Cara Nguyen This case study is to develop your ability to analyze, calculate credit cost, and choose the best credit options. Objectives: After completing this case study activity, you will be able to: Calculate if the client will have enough fund for down payment. Calculate the monthly mortgage payment and amortization period. Analyze if the client is qualified for a home equity line of credit. Choose the better option between mortgage and home equity line of credit. . Instruction: 1. Read the following case study. 2. Complete and answer the Case Study Instruction and Questions listed below. 3. Submit the completed file to Blackboard, Weekly Session, Week 11, In-Class Assignment 2. Introduction Lam and Cara, work for the Town of Bracebridge, with an annual gross salary of $40,000 each. The expected annual salary increase is 2.5%. Below is a list of their assets and liabilities. Assets $ Cash (annual rate of return 0.25%) GICS (annual rate of return 1.5%) CSBS (annual rate of return 2.75%) Automobiles House (current) 6,000 5,000 7,000 32,000 230,000 Liabilities Credit cards (18% annual rate, 3% miniumum payment on balance Car loans ($500 per month, three years left) Current property taxes (per year) outstanding bill $ 10,000 15,000 2,400 165,000 Mortgage (contracted 2 years ago) Amortization period, 25 years Three years left on the 7% five year mortgage term 165,000 Mortgage contracted 2 years ago) Amortization period, 25 years Three years left on the 7% five year mortgage term Lam and Cara want to purchase a new house costing $320,000. They qualify for a 3-year fixed term mortgage at 5.75% with a 20-year amortization period. Property taxes on the new house is $3,600 per year. The market price for their current house is $247,900, with legal fees, real estate and land transfer fees totaling $7,500. They hope the net proceeds from the sale of the current house, will give them at least $80,000, which would be used as a down payment for the new house. If the net proceed is less than $80,000, they will use their cash savings to ensure that the down payment is $80,000 Case study instructions and questions: 1. Will Lam and Cara have the $80,000 down payment needed from the sale of the current residence? 2. What is the monthly mortgage payment on the new house, assuming they have the $80,000 down payment? Will they qualify for the new mortgage loan? (Hint: include GDS and TDS calculation) 3. Suppose Lam and Cara have a provision in their new mortgage agreement, that allows a mortgage renewal in three years at current rate, and then at five years, by making a payment of $20,000 three years from today and $25,000 eight years from today. If the monthly payment remains the same, how long will it take them to pay off the new mortgage? 4. Lam and Cara is considering another alternative. Instead of buying a new house, they should get a home equity line of credit for $55,000, which has 4% interest and a minimum monthly payment that is twice the interest payment. The $55,000 will be use to purchase a condominium that will have a conventional mortgage. Would they be qualified for the home equity line of credit? What would be the maximum purchase price for the condominium (ignore legal and real estate fees)
