# 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. |

## 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**.## 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. |

## 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.**## 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. |

## 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.## 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