Scenario 2

Charlie and Mary graduated college at 22, did not go on to graduate school and each earned $30,000 a year. They were avid savers and did not like spending tons of money. They enjoyed being home, playing video games, and hanging out with friends. They started saving as much as they could afford into their 401K as soon as they started working. They contributed a total of $6,000 a year ($3,000 each) to their 401K. It was all they could do but they were happy they were doing something. They bought a used truck and a 5 year old Honda and drove each of those cars forever. They always bought used cars and never had car payments. They also paid down their credit card each month to a zero balance because they hated to have credit card debt. They used their credit cards all the time because of the cash back rewards but always paid it off so it never incurred interest. They did have student loan debt of $250 a month.

They decided to buy a house when they were 30 and had their first kid. Even though their salaries increased 5% per year, they figured they would not be able to afford much because of their salaries but they had great credit. They had credit scores of 760. They also had $60,000 saved for a down payment they saved for 8 years for this house. The mortgage broker told them they could afford a mortgage in an amount equal to 28% of their gross monthly income and 40% of their total outstanding debt (including mortgage debt, student loans, car payments and credit card debt). The broker told them they could get an interest rate of 5.5% because of their outstanding credit. They were told they would need to put aside 4% for closing costs.

How much house could they afford (i.e. how much of a mortgage will they qualify for?)

Even after they bought a house, they continued to invest in their 401K at a total of $6,000 a year, never changing the amount. They also wanted to retire when they are 60. They realized their 401k averaged 8% a year.

How much will they have in retirement?

Scenario 3

Chris and Jane had a job in Raleigh but knew that they would be moving to a new city every 6 years. They were trying to decide whether to buy a house or rent a house for the next 6 years. If they bought a house, they knew they could afford a $400,000 home, after a down payment of $80,000 and closing costs of 4% of the cost of the house. The $320,000 would be at an interest rate of 6%, but they would also need to add in $5,000 a year of property taxes, and $1,200 a year for homeowners insurance. They estimate that monthly maintenance (air conditioner, lawn service, light bulbs, etc.) would cost $400 a month. They would also need to budget for an additional $100 a month in utilities that are a direct result of home ownership. They anticipate that the house will appreciate by 10% in 6 years but they will have to pay real estate brokers fees and other costs of sale equal to 7% of the sale price.

If they rent a house, they knew they could find a great rental property for $2,400 a month. They would need to pay a security deposit of $3,000. The rental price will increase by 3% per year over the 6 years. They would also need renters insurance of $125 a month. All other maintenance costs are covered by landlord. All other utilities are the same whether they buy or rent.

Should Chris and Jane buy or rent? Explain your answer?