Harper's Dream Home

Pre-Calculus Mrs. Colwell Hour 3

The Home

The House - $315,000 (11928 Haskins Street Overland Park, KS 66213)

One of the best investments a person can make is a home, and this one is perfect. Economically priced at 315,000, this 4 bedroom and 4 bathroom house features a large dining room, family room, and even a home office for Harper's retail business! It also boasts a large kitchen and is located in a wonderful neighborhood. The outside patio is great for entertaining and the backyard is fully fenced and even has a great pool. The home is currently listed with REMAX Realty (MLS Number: 1837783) and can be financed at a great rate with Bank of America!

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The Finances

Amount That Can Be Afforded Each Month: $1630.55

Rationale: Harper's yearly salary is $70,000, after 30% tax is subtracted, she makes $49,000. So, every month Harper will earn a gross income of $4083.33 which will need to be deducted from with monthly costs.

- Subtract $402.78 Monthly for Student Loans (Paid back in 10 years)

- Subtract $325 for the Car Payment

- Subtract $500 for Savings

- Subtract $300 for Food/Nutrition

- Subtract $375 for Phone/Internet/Cable/Utilities

- Subtract $250 for Entertainment

- Subtract $300 for Gas/Car Insurance

After the aforesaid deductions, Harper is then left with $1630.55 to spend per month for a house mortgage.

Amount That Can Be Borrowed: $317,141.54

Rationale: When using the present value of an annuity equation to calculate the amount that can be borrowed, a "R value" is $1630.55, an Interest Rate at 4.625 (according to Bank of America), and a time period of 30 years can be used to show that up to $317,141.54 can be borrowed from the bank. Using this number, a $315,000 house was the perfect number for Harper, as she can build equity with a large home and have room to build a family if she chooses to do so. This may seem like a large home for just one person, but this purchase is an investment that can overtime build value. Additionally, if the house has plenty of room for a growing family if that is needed.

Final Mortgage Financing

Interest Rate for 30 Year Fixed Home Loan [Bank of America] - 4.625%

Minimum Monthly Mortgage Payment After Approval - $1619.64

Justification: The aforesaid information was calculated using the present value of an annuity equation, using the home list price of $315,000, the approved interest rate (from Bank of America) of 4.625, and the 30 payment deadline. The calculated value of $1619.64 is under the determined affordable monthly payment (seen above) and would be a great deal for this home.

Alternative Financing

If Harper was to alter her financing by increasing her payment by 15%, her housing financing would change as follows:

- Her New Mortgage Monthly Payment: $1862.59

- Her New Time to Finish Mortgage (In Years): 22.85 years

- Time Saved: 85.74 Months or 7.145 Years

- Amount of Money Saved: $72,349.32

Justification: The aforesaid information can be calculated using the Present Value of an Annuity equation, with an augmented monthly mortgage payment which is determined by increasing the minimum payment of $1619.64 by 15%. This calculation yields a value of $1862.59, which is then used with the fixed interest rate of 4.625% and the list price of $315,000 to find the new amount of time needed to pay off the loan. Next, the number of years needed to pay off the loan with and without the 15% increase can be multiplied by the each respective monthly payment with and without the 15% increase to find the amount saved.

By Vijay Ramasamy

Pre Calculus Hour 3 Mrs. Colwell

Scenario 2