Mini-Case : Home Ownership

With a raise from his employer, an investment firm, Seyed Abdullah, 31, is inspired to look for a new home. He has come to you for help.

Financially he is fairly secure, but he is also very averse to risk. His salary is $93 000 a year, but he does not know how much he should spend on housing. His current housing expenditures include rent for his apartment of $1600 per month and tenants insurance premiums totalling $300 per year. Although he has been paying his rent on a monthly basis, Seyed would like to convert the payment frequency of any monthly mortgage payment he takes on to accelerated biweekly. His monthly bills include a $500 per month lease payment for his 2012 Acura MDX and a $300 per month student loan payment.

Seyed has researched the recurring costs of home ownership. He has found that property taxes

and home insurance premiums for the average home in the city in which he lives are about $2400 and $450 per year, respectively. He is unsure of the maintenance and heating costs but estimates them at $1000 and $1300 per year, respectively. Given how busy he is at work, Seyed thinks that a high-end condo might best suit his lifestyle. The condo fees associated with such a property would be approximately $400 per month.

Seyed likes the idea of owning his own home because as the real estate values increase, the value of his home will increase. Local property values have been increasing at 5 percent per year over the past seven years. One concern about buying a home is the immediate cost of down payment and closing costs. These closing costs, he has found, come to about $5000. He also knows that he would want to make a 20 percent downpayment.

Seyeds bank will use a maximum TDS ratio of 40 percent to qualify him for a mortgage. In addition, the posted five-year mortgage rate is 5.35 percent, compounded semi-annually. List and describe four types of housing that Seyed should consider. Using the information provided in the case, determine the maximum mortgage payment that Seyed would qualify for. What would be the accelerated biweekly payment on his mortgage? At an amortization period of 25 years, what is the maximum mortgage amount that Seyed would qualify for? If Seyed would

like to make a 20-percent down payment, what is the maximum value of the home that he would qualify for? Including maintenance, closing costs, and his required down payment, how much money does Seyed need to set aside?