Nominal and Effective Interest Rates Chapter 4 CASE STUDY IS OWNING A HOME A NET GAIN OR NET LOSS OVER TIME? Background Case Study Exercises 1. The 30-year fixed-rate savings or investments. analyzed below. No taxes are considered on proceeds from the mortgage (plan A) is The Carroltons are deliberating whether to purchase a house or continue to rent for the next 10 years. They are assured by both of their employers that no transfers to new locations will occur for at least this number of years. Plus, the high school that their children attend is very good for their college prep education, and they all like the neighborhood where they live now Perform a similar analysis for the 15-year loan (plan B) and the rent-don't buy plan. The Carroltons decided to use the largest ficture worth after 10 years to select the best of the plans. Do the analysis for them and They have a total of $40,000 available now and estimate that they can afford up to $2850 per month for the total house payment select the best plan. Plan A analysis: 30 year fixed-rate loan If the Carroltons do not buy a house, they will continue Amount of money required for closing costs: to rent the house they currently occupy for $2700 per Downpayment (10% of$330,000) month. They will also place the $40,000 into an investment Up-front fees (origination fee, attorney's instrument that is expected to earn at the rate of 6% per year. Additionally, they will add to this investment at the end of each year the same amount as the monthly 15-year mortgage payments. This alternative is called the rent- don't buy plan. $33,000 fee, survey, filing fee, etc.) Total 3,000 $36,000 The amount of the loan is $297,000, and equivalent monthly principal and interest (P&I) is determined at 5.25%/12-04375% per month for 30(12-360 months. A-, 2970000A/P,0.4375%,360)-297,000(0005522) Information Two financing plans using fixed-rate mortgages are currently available. The details are as folows. - $1640 Add the T&I of $500 for a total monthly payment of Plan Description A 30-year fixed rate of 5.25% per year interest; 15-year fixed rate of 5.0% per year interest; Other information Payment, - $2140 per month 10'% down payment The future worth of plan A is the sum of three future worth components: remainder of the $40,000 available for the closing costs (F): left-over money from that available for monthly payments (Faak: and increase in the house value when it is sold after 10 years (Fu). 10% down payment Price of the house is $330,000 Taxes and insurance (T&I) are $500 per month Up-frons fees (origination fee, survey fee, attorney's fee, etc.) are $3000. These are calculated here. Fu" (40,00)-36,000)(F/P0.5%, 120) - $7278 Any money not spent on the down payment or monthly pay- ment will be invested and return at a rate of 6% per year (0.5% per month). Money available each month to invest after the mort payment, and the future worth after 10 years is The Carroltons anticipate selling the house after 10 years 2850- 2140 - $710 Fa.-7100F/4,05%, 120) and plan for a 10% increase in price, that is, $363,000 (after all selling expenses are paid) $116,354