Harper's Finances

Boda Pre-Calc Finance Project - Hour 5

Scenario

Harper earned her bachelor’s degree in business two years ago. She is now 25 and is managing a retail store. Her annual salary is $70,000. She 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.

Salary

Harper earns an annual salary of $70,000. However, it is necessary to take into account the taxes that will be taken out of her salary. Total taxes cut about 30% on one's salary, so truly, Harper earns $49,000 a year. This is approximately $4083.33 a month.

Student Loan

Harper has a total student loan of $35,000. With the current interest rate of 6.8%, her monthly payment is $402.78 a month.
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Since, she has been paying the loan off for the past two years, Harper has already paid off $5,240.20. The present value of her loan is $29,759.80. She has eight years left to pay off her loan.
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Expenses

Harper's expenses consist of the following (per month):
  • $402.78 - Student Loan Payments
  • $325 - Car Payments
  • $300 - Food Budget
  • $100 - Gas Budget
  • $330 - Utilities' Costs
  • $1000 - Car Insurance Payments
  • $50 - Cell Phone Bill
  • $100 - Entertainment Budget
This comes to a total of $2607.78, which when subtracted from her monthly salary, leaves Harper with $1475.55 excess money per month.

House Budget

In order for Harper to be able to buy a house, she must be sure that the mortgage payments will fit into her budget. She cannot pay more than $1475.55 a month.

Current interest rates on mortgage loans from Harper's bank are just under 4%.

If Harper were to pay the exact amount of money that she has available toward her mortgage loan, then she would be able to afford a house worth up to $308,955.33.
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However, Harper should probably be more reasonable and not max out her monthly spending money (taking into account extra expenses). If she makes a more reasonable budget of spending about $900 per month on her mortgage payments (leaving her with $575.55 for excess spending money), then she can afford a house that is worth up to $188,515.12.
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House Purchase

Harper has found the house of her dreams! Located in Overland Park, KS, this 1,234 square foot house has 3 bedrooms, 1 bathroom, and is selling for $138,000.
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Mortgage Loan

Harper obviously cannot afford to pay $138,000 out of her pocket. So she goes to her bank which offers her a 30 year fixed rate loan with the following details:



  • 20% down payment = $27,600
  • Interest rate: 3.750%
  • Monthly Payments: $511
Assuming that Harper has saved up the $27,600 for the down payment in her bank account, or she somehow arranges for the money, she finds this plan to be the best for her as it allows her to pay the minimum monthly payments.
However, after seeing the amortization table for her loan, Harper realizes that, toward the start of her loan, very little of her monthly payments actually go to paying off her mortgage; a majority goes to simply paying interest.
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Harper decides to consider other options for her mortgage loan. One is that of increasing her monthly payment by 15%. With this option, she would have to pay $587.65 a month, rather than just $511. Under this loan (with the same interest rate), Harper would only have to pay her loan for 24 years, 6 years less than her original plan.
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Additionally, Harper's total payment would equate to be $14,716 less than the original loan.
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Harper decides that there are many more factors to take into fact when taking a mortgage loan than simply the monthly payment amount. She resolves to only take out a loan after considering all of these factors to see what is best for her.

References

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