In$-$Class Problem Solving #$2$

Chapter $5$ and $6$

$1$ Home Equity Line of Credit $($HELOC$)$

Alexah purchased a home for $$500,000$ a few years ago. The home is worth $$650,000$ now. Her remaining

mortgage balance is $$300,000.$ What is the maximum HELOC $($home equity line of credit$)$ she can borrow?

Can borrow up to $80\%$ of the appraised value of your home, less mortgage outstanding

Solution: Market Value $=$

Maximum allowable HELOC $=$ of market value Maximum appraised value $=$

Mortgage $=$

Maximum HELOC $=$

$2$

Solution:

Recommended $\%$ of take home pay on debt payments $=$

Maximum amount on debt payments $=$

$3$ Debt$-$payments$-$to$-$Income Ratio

Shayla$$s monthly gross income is $$5,500.$ Her employer withholds $$700$ in federal and provincial income taxes,

$$294\mathrm{.}68$ towards the Canada Pension Plan, and $$82\mathrm{.}67$ in EI contributions. Shayla contributes $$150$ per month

to her RRSP$.$ Her monthly credit payments for VISA and MasterCard are $$85$ and $$105$ respectively.

Her monthly payment on an automobile loan is $$465.$

What is Shayla$$s debt payments$-$to$-$income ratio? Is she living within her means? Explain

Solution:

Calculate Net Take Home Pay Calculate Total Debt Payments

Gross Income

Less:

Total Debt Payments $=$

Net Take$-$home Pay Debt Payments to Income Ratio

Debt Payments

Monthly Income

Recommended $\%$ of take home pay on debt payments $=$

Explanation:

$4$ Effective Cost of Borrowing

Vaani borrowed $$1,000$ and paid $$45$ in interest when she repaid the principal after one year. The lender

also charged her a $$10$ service fee on a discount basis. What was the effective cost of her loan?

Solution:

Funds borrowed Interest expense

Less Service Fee

Cash available Effective Cost of loan $=$ Interest

Funds available

$5$

If interest rate quoted on Vaani$$s loan was $4\mathrm{.}5\%$ and had been compounded monthly, instead of annually,

what would have been the effective annual interest rate charged on the loan?

TVM Inputs

Nominal rate $=2$nd ICON

compounding periods $=$ NOM $=$ ENTER

C$/$Y $=$ ENTER

EFF $=$ CPT Effective Annual Interest Rate $=$

HELOC: A loan based on the current market value of your home.

Credit Limit

Faqiha$$s net take home income is $$4,500.$ What's the maximum she should use on debt payments?

Calculating Effective Annual Rate $($EAR$)$

Solution: $($BAII Plus Calculator$)$

$6$ Calculating Finance Charge

You have been pricing cellphones in several stores. Three stores have identical prices of $$450.$

Each of these store charges $19\%$ APR, has a $30-$day grace period, and sends out bills on the first of the month.

On further investigation, you find that Store A calculates the finance charge by using the average daily balance

method; that Store B uses the adjusted balance method, and that Store C uses the previous balance method.

Assume you purchased the cellphone on May $1$ and made a $$125$ payment on June $15.$

What will the finance charge be for June if you made your purchase from Store A$,$ or from Store B$,$ or from Store C$?$

May $1$ to $31$ is the $30-$day grace period indicating finance charges begin on June $1$

Solution:

Finance Charge Calculations Ave Daily Balance Adj Balance Previous Balance

Store A Store B Store C

Purchase May $1=$ Jun $1-15$ Purchase Balance May $31=$

Payment June $15=$ Jun $16-30$ Less: Pmt

Finance charges start June $1$ Ave daily balance $=$ Adj Balance

Finance Charge $=$ Finance Charge $=$ Finance Charge