Tom Lamont, age 30, and Lin Lamont, age 31, have been married for six years. They got married right after Tom graduated from college. They have come to you for help in planning their financial future. Theyre both employed in highly stable positions. Tom works in the marketing department of a large corporation. Lin works for a nonprofit service organization.

Instructions

Use the following income, expense, asset, and liability information to answer Tom and Lins questions.

QUESTIONS:

1. Lin has been investigating the housing market. She found a wonderful new house priced at $205,000. Given their credit score, she is confident that she and Tom can qualify for a 30-year, fixed-rate 5.20% mortgage. If they were to purchase this home, how much of a down payment will they need to have in order to avoid PMI? How much will they need to put down if they use a 5% down payment?

2. Given their current financial situation, do Lin and Tom have sufficient assets to make either a 5% or 20% down payment? If they dont have enough, what can they do?

3. Lin anticipates receiving a gift from her parents to help offset the expense of a down payment. If a homeowners insurance policy will cost $1,400 per year and property taxes will be $4,300 per year, what will be their monthly PITI on a loan with a 20% down payment? What will be the monthly PITI with a 5% down payment, assuming private mortgage insurance costs $900 per year?

4. Do Lin and Tom meet HUDs housing payments to income ratio? Do they meet HUDs total fixed payments to income ratio for either the 20% down payment scenario or the 5% down payment scenario?

5. Based on your estimates, do you agree or disagree with Lin that they should purchase a home, assuming they have at least a 5% down payment, at this time?

Income and Expense Statement of Lamont Household Tom Lin Joint Income 44,000 49,000 Interest 23 Income 44,000 49,000 23 Taxes 9,966 11,099 Rent 32,550 Auto Insurance 2,800 Food & Eating Out 5,000 Car payments 4,634 4,804 Student Loans 4,869 3,060 Hobbies 1,200 Sports Retirement Savings 1,760 2,940 Vacations 4,900 Credit Cards 2,400 Expenses 22,129 23,103 47,650 Net 21,871 25,897 (47,627) Total 93,000 23 93,023 21,065 32,550 2,800 5,000 9,438 7,929 1,200 900 4,700 4,900 2,400 92,882 141 900 Net Worth Position for the Lamont Household Tom Lin Joint Checking 250 Savings 2,300 Car 1 13,000 Car 2 9,000 Furnishings 3,500 Clothes 2,400 3,300 Other household 5,000 Sports equipment 2,300 Hobby supplies 1,000 Retirement: 401(k) 23,000 Retirement: 403(b) 42,000 Total Assets 40,700 55,300 11,050 Credit Cards 13,000 Student Loans 7,400 18,000 Car Loans 3,000 12,000 Total Liabilities 10,400 30,000 13,000 Net Worth 30,300 25,300 (1,950) Total 250 2,300 13,000 9,000 3,500 5,700 5,000 2,300 1,000 23,000 42,000 107,050 13,000 25,400 15,000 53,400 53,650 Income and Expense Statement of Lamont Household Tom Lin Joint Income 44,000 49,000 Interest 23 Income 44,000 49,000 23 Taxes 9,966 11,099 Rent 32,550 Auto Insurance 2,800 Food & Eating Out 5,000 Car payments 4,634 4,804 Student Loans 4,869 3,060 Hobbies 1,200 Sports Retirement Savings 1,760 2,940 Vacations 4,900 Credit Cards 2,400 Expenses 22,129 23,103 47,650 Net 21,871 25,897 (47,627) Total 93,000 23 93,023 21,065 32,550 2,800 5,000 9,438 7,929 1,200 900 4,700 4,900 2,400 92,882 141 900 Net Worth Position for the Lamont Household Tom Lin Joint Checking 250 Savings 2,300 Car 1 13,000 Car 2 9,000 Furnishings 3,500 Clothes 2,400 3,300 Other household 5,000 Sports equipment 2,300 Hobby supplies 1,000 Retirement: 401(k) 23,000 Retirement: 403(b) 42,000 Total Assets 40,700 55,300 11,050 Credit Cards 13,000 Student Loans 7,400 18,000 Car Loans 3,000 12,000 Total Liabilities 10,400 30,000 13,000 Net Worth 30,300 25,300 (1,950) Total 250 2,300 13,000 9,000 3,500 5,700 5,000 2,300 1,000 23,000 42,000 107,050 13,000 25,400 15,000 53,400 53,650