Scenario 1
Hour 2 PreCalc Finance Project
By Eryn Samuelson
Meet Brent
Upon completing high school, Brent became a construction foreman. At 24 years old, he is eager to buy his first home! Earning an annual salary of $60,000 ($5000 per month), Brent can buy a decently sized home in a nice area.
Monthly Amount
Expenses
In order to begin his house hunt, Brent must figure out his budget. He must set aside enough money for the necessities. The table to the right lists his expenses, totaling up to $15,400 per year and $1,283 per month.
Taxes
Brent also must account for taxes. Approximately 30% of his annual salary will go towards taxes; therefore, Brent will pay $18,000 in taxes each year.
Monthly Budget
After Brent's taxes and expenses are subtracted from his annual budget, he is left with $26,600 per year and about $2217 per month.
Total Amount
Rules of Thumb
Mortgage financier, Freddie Mac, suggests that your mortgage payment should be no more than 25% of your income (25% of Brent's annual income is $11,250 and 25% of his monthly income is $1250). Credit Suisse, a financial services company, recommends that 1/3 of your income goes toward housing (1/3 of Brent's annual income is $20,000 and 1/3 of his monthly income is about $1,666).
Using these two tips as guidelines, Brent concludes that he can afford to borrow between $1250 and $1,666 per month. Based on a 4.734% interest rate, he could afford to borrow between $240,069 and $319,964 (Shown in the picture below).
Interest Rate
Right now, the annual percentage rate for a 30-year fixed rate loan is 4.734%.
Minimum Payment
Brent Found a House!
After looking at several houses, Brent finally decided on a cozy yellow cottage. It's price is set at $169,950, which is a lot less than the amount he could borrow, so he will save a lot of money!
Down Payment
In order to get a loan from the bank, Brent must place a down payment on his house. Typically the down payment is 20% of the price of the house. That means that Brent must put down a $33,900 down payment.
Minimum Payment Required
Using the present value formula, Brent calculates that he must pay at least $707.92 each month in order to pay off his mortgage in 30 years.
Increased Principle-Saving Time and Money
Increasing the monthly payment by 15%
Increasing the monthly payment can save Brent money in the long run.
Time Saved
If Brent were to pay $814.11 per month instead of $707.92, then he will be able to pay off his mortgage in 22.76 years instead of 30 years, saving him 7.24 years of having to make a payment for his mortgage each month.
Money Saved
After calculating the actual amount Brent will be paying the bank by the time he has paid off his mortgage, it is obvious that increasing the amount of his monthly payment is a good decision. By increasing his payments by 15%, Brent can save $162,513.
References
Umberger, M. (January 1, 2014). ForSaleByOwner.com. http://www.forsalebyowner.com/education/buying-a-home/mortgage/107-which-is-just-right-determining-how-much-house-and-loan-you-can-afford-defies-formulas
(January 1, 2014). Reece and Nichols. http://www.reeceandnichols.com
(January 1, 2014). Bank of America. https://www.bankofamerica.com/home-loans/mortgage/overview.go