Use the following to answer questions 1-4.

You currently live (rent free) in your parents' basement but it's a bit awkward when you bring dates home. Your friends are looking for a new roommate and have asked if you're interested in moving in. Your share of the rent (which includes all utilities) will be $800 per month and you will be signing a two-year lease.

You parents think you should save your money so you can buy a house when you graduate in two years. If you stay living in your parents' basement, and deposit the money you save by not having to pay rent into a savings account at the beginning of each month, your parents have offered to give you a gift equal to the amount you have saved towards a down payment on your first home. Assume the bank is offering a 5% annual interest rate, compounding monthly, on new savings accounts.

1 Your monthly rent payment in this example would be considered _________________.

An ordinary annuity

An annuity due

Amortization

A perpetuity

2 If you take your parents up on their offer, how much will have (in total) for a down payment on a home when you graduate? Round to the nearest whole dollar. * Hint: remember your parents have offered to match what you save on your own.

$3,444

$20,465

$40,297

$40,465

3 Suppose you took your parents up on their offer and are now getting ready to graduate. You have decided that you can afford a house payment of $1,000 per month. You received quotes from several lenders and determined that the most likely annual interest rate you will be offered is 4.25%. What is the maximum you can pay for a house? Hints: (1) Mortgage payments are in arrears (meaning they are paid at the END of the time period). Be sure your calculator is in the correct mode before solving. (2) After you solve for the maximum loan amount, don't forget to add on your down payment to determine the sales price

$203,277

$223,509

$243,742

$249,927

4 Would you be required to pay PMI with this loan?

Yes

No

5 What is your EBC if you select Loan A? Enter your answer as a whole number with 3 decimal points (no percent sign).

6 What is your EBC if you select Loan B? Enter your answer as a whole number with 3 decimal points (no percent sign).

7 Assuming you intend to stay in the house for 30 years, which loan should you choose?

Loan A

Loan B

Answer the remaining questions in this assignment based off of the laon you selected in Question #7

8 You decide to rent out a room in your new home to your best friend for $500 per month. If you add the extra money to your monthly house payment, how many years will it take you to pay off your mortgage?

12 years

15.69 years

30 years

188 years

Use the following to answer questions 9-12.

Five years later, you are offered your dream job in Costa Rica. You need to sell this house in order to purchase a new one where you are moving. Rents have increased since you purchased the home and you estimate that the home will rent for $1700 per month (net). You have found a high quality tenant willing to sign a five year lease under the following conditions. Rent will be $1,700 for the first two years, and increase by 2 percent each year for the remaining three years. The average investors holding period on residential rental properties is five years. Similar homes have appreciated 10 percent since you purchased the property (that is, your home is now worth 10% more than you originally paid) and are expected to have appreciated another 10 percent in five years. The appropriate discount rate is 4%.

9) What is the minimum price you should list the property for? Round up to the nearest whole dollar. *Solve this problem by estimating the market value of the property at the end of the investors holding period in addition to considering the stream of cash flows the investor will receive from rent.

10) What will the investors going-in IRR be if they pay exactly list price? Enter your answer as a whole number.

11) Assume you saved the rent money from your best friend rather than putting the additional $500 towards your mortgage payments. You will close on the home after making your last payment in year 5. How much will your loan payoff amount be (in other words, what is the outstanding balance on your loan after 5 years)? Round to the nearest whole dollar.

12) Assuming you sell the home for exactly list price, pay a 6% real estate broker commission and $3,500 in Seller closing costs, what will be your net proceeds from the sale? Round to the nearest whole dollar. *dont forget to include your loan payoff amount.

Use the following to answer questions 13-14.

You are starting to have second thoughts about moving. After going back and forth for several weeks you decide that you will make a decision based on whether or not you will refinance the house. If you refinance you will stay, if you dont you will move. You can refinance the home with a new interest rate of 3.5% for a 30 year term. You will refinance on the same day you would have closed on the home (so you can use the outstanding loan balance you previously calculated here). The cost of refinancing is 4.5% of the loan amount. Assume you anticipate selling the home (or refinancing again) in 5 years.

13) What is the net benefit of refinancing? Round to two decimal places

14) Will you be moving to Costa Rica?