Scenario 2

Julie Byrne Hr 2, PreCalc Finance Project

The Scenario

Harper earned her bachelor’s degree in business. She is now 25 and is managing a retail store. Her annual salary is $70,000. She currently has $35,000 in student loans, and also has a car payment of $325 per month. She wants to buy her first home in the next few months. (NOTE: Approximately 30% of the annual salary goes to taxes. Also, student loans must be paid off in 10 years.)

To Afford the House

Harper brings home $3,450.57 every month for the first ten years (since she will be paying off her student loan during that time and is paying for her car). Then, for the last 20 years of the 30-year loan, she can pay $3,853.33 (since her student loans will be paid but she is still paying for her car). Since she cannot pay over $3,853.33 during the ten years that she would be paying off her loan, the maximum amount she can afford to pay each month for 30 years is $3,450.57. If she paid $3,450.57 on a house every month for a year, she is paying $41,406.84 a year for the house. For 30 years, she would have paid $1,242,205.20. That is the maximum cost her house can be.

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The house chosen is $229,950, and at an interest rate of 17.78%, the minimum monthly payment for Harper for 30 years is $1,152.


When paying $1,152 a month, it would take a full 30 years to pay off the house, and Harper would have $64,197.60 at her disposal. On the other hand, if she chose to pay 15% more than the minimum monthly payment she would have to pay $1,324.80, she would pay off the house 7 months earlier, and she would have $935,413.20 in her hands. In all, by choosing to pay 15% more on her monthly payment, Harper would finish in 29 years, 3 months and would have saved $871,215.60.

References

The Koehler Bortnick Team (2013, Dec 19). 11521 Flint St, Overland Park, KS 66210. Retrieved from http://www.zillow.com/homedetails/11521-Flint-St-Overland-Park-KS-66210/75629878_zpid/