Precalc Finance Project–Scenario #1
By: Molly Kruse
Hi, my name is Brent and I am a construction foreman who did not attend college. I am 24 years old, and earn an annual salary of $60,000. I have to make monthly car payments of $450. I am wanting to buy my first house in the next few months!
To determine the monthly amount Brent could afford I first took out 30% for taxes, that left me with $42,000. I then took out monthly payments of $450 for his car loan, $300 for utilities, $200 for food and clothing, $120 for gas, $100 for insurance, and $100 for entertainment and miscellaneous expenses. According to my mom those payments would be about the right amount for a single man living on his own. Overall Brent is able to afford monthly payments of $2230.
Total Amount Brent Can Afford
With all monthly expenses taken out, Brent has $2,230 a month. Taking into account unexpected costs and savings money, Brent can comfortably spend around $1,200 a month on mortgage. After going to the Bank of America website I discovered that the rate for a 30 year fixed loan is 4.625%. I plugged that into the present value equation (pictured to the right) to find out that Brent can afford to borrow $233,399.68. Meaning Brent can afford a house with a maximum value of $233,399.68.
Pictures of the House
Increasing Minimum Monthly Payment by 15%
If Brent were to increase his minimum monthly payment by 15%, he would be paying $1,240.85 a month (1,079 x 1.15= 1,240.85). By increasing the payments to $1,240.85 Brent would complete his house payments in 274.6 payments or about 22.8 years – paying $129,496.56 in interest. With his original payment of $1,079 a month Brent would complete his house payment in 360 payments or 30 years – paying $178,440 in interest. By increasing his monthly payment by 15% it is obvious that Brent would save a lot of money and time. More specifically Brent would cut off about 7.2 years of mortgage payments and overall he would save $48,943.44. (All justification shown below)