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Description of the Problem:

Emma Jones is planning to move to Oxford, MS to start her new job at a real estate

firm. She has not yet decided whether she wants to rent or buy a property in Oxford.

Emma is not from Mississippi and is asking your team to help her make this financial

decision. Her monthly housing budget is $$3,100.$ This budget must cover housing

expenses including rent or owner$$s costs $($example: mortgage, hazard insurance,

property taxes, and Home Owner Association fees, if any$).$ A good start of the

analysis is to apply financial concepts such as the $$time value of money.$$

Emma$$s contract is for three years and is renewable for three more. Her plan is to

stay in the Oxford area for no more than $8$ years. Even if her job continues to work

out well, she will try to move from the location she selects to a different house.

Emma has money saved for this transaction and plans to make a $20\%$ down payment

on any house that she purchases.

Emma will make this decision purely based on financial motives. She is not worried

about arguments such as $$you are throwing away your money when renting$$ or $$it

is better to be flexible and rent rather than buy$.$

Total points for the case: $100$ points

Questions:

$1.$ Estimate the maximum house value Emma can afford to buy.

Assume the mortgage that terms that Emma has is based on a fixed$-$rate,

$30-$year maturity, $80\%$ LTV$,$ with no points. The mortgage interest rate that

she was quoted is $7\mathrm{.}50\%$ with monthly payments. Assume that property tax

rate in the city of Oxford is $1\mathrm{.}1\%$ per year based on property value; assume

the hazard insurance premium is $0\mathrm{.}6\%$ per year based on property value and

assume $$85$ per month for maintenance.

Determine the required monthly mortgage payment and the maximum

house value she can afford if she buys.