Let’s assume you purchased a new car and financed it through the dealer. The purchase price was $30,000 including all fees, taxes and delivery costs. The dealer offered an ‘all inclusive’ financing plan at a 12% rate. Your 30 monthly payments were $1,300, derived by adding interest of $9,000 to the $30,000 and dividing by 30 monthly payments. Your friends tell you that your interest rate is above 20% and that you should have borrowed from your home equity line at a lower rate. Are they right? Practical Application 2 

Part A You wish to purchase a home and have been very successful in saving $12,000 for a down payment. You can get a 30 year mortgage at a fixed rate of 11.5%. The most you can afford is $630 / month for payment. What’s the maximum you can pay for a house? 

Part B You plan to be married soon and your partner can contribute $250/month toward the monthly payment, but nothing toward the down payment. Now what price can you afford to pay? 

Part C You have learned of a special bank offer to first-time home buyers. Interest rates will be dropped to 9% for the life of the mortgage. Now, what can you afford to pay?