Finance Project

Mychal Masterson

Colwell

Hour 6

Scenario 3

Jenny went to college for two years, and then dropped out. Unfortunately, by the time she dropped out of college, she had $20,000 in student loans. She has been working as a bank teller for the last three years. Her salary is $40,000. She also has a car payment of $230 per month. She is excited to buy her first home.

"Duties"

Approximately 30% of your annual salary goes to taxes. Student loans must be paid back in 10 years. The current interest rate on a student loan is 6.8%. You will need to determine the monthly payment for any student loans and subtract from the monthly net income.


After Jenny's Duties

After the 30% tax on her income, Jenny will have an annual income of $28,000. This becomes $2333.33 per month. Her student loan demands $230.16 per month. After the taxes on her annual income, the monthly student loan costs, and the monthly car payments, Jenny is left with $1873.17 per month, or $22478.04 per year. If she were to spend every penny she has left on a monthly house payment, Jenny could theoretically afford a house that is worth $674,341.20, if she didn't have to make a downpayment. However, this leaves her no money for her necessities like food and clothes etc.


Buying a House

Out of her $1873.17 per month budget, it would make sense that she saves at least $1000 per month for her expenses. That means that she is looking to make a maximum monthly mortgage payment of $873.17. When Jenny took this information to her bank, Bank of America, they told her that her APR for a 30 year fixed rate mortgage would be 4.751%. Jenny then took this information and, using the finance app on her graphing calculator, calculated that she could afford a house with a maximum price of $167,376.69 if she made a monthly payment of $873.17. However, Jenny doesn't need an expensive house, so when she found a $65,000 house in Overland Park while she was browsing RE/MAX's website, she fell in love with the house and affordable price. With this house, she calculated that she would only have to pay a monthly fee of $339.11 for the 30 year fixed rate mortgage with an APR of 4.751.

The Other Option

However, she also had the option of increasing this monthly payment by 15%, which would make her new monthly payment $389.98. This would mean that she could pay off her $65,000 mortgage in only 273 payments (22 years 9 months) instead of the original 360 payments (30 year) plan. With this increased monthly payment, Jenny would spend $106,464.54 for the house, as opposed to spending $122,079.60 if she were to pay the minimum monthly payment of $339.11. If she payed the 15% increased payment, she would save herself $15,615.06 and she would pay off her house 7 years and 3 months faster than if she had payed the minimum monthly payment.



References

(2013, December 31). Mortgage: Buy a Home. Retrieved from http://www.bankofamerica.com/home-loans/mortgage/overview.go.



(2013, December 31). RE/MAX: Property Search. Retrieved from http://www.remax-midstates.com/Home/7538-Santa-Fe-Drive-Overland-Park-KS-66204/HRT/1858797/.


(2013, December 31). 7538 Santa Fe Drive, Overland Park, KS 66204 [Monograph]. Retrieved from http://www.remax-midstates.com/Home/7538-Santa-Fe-Drive-Overland-Park-KS-66204/HRT/1858797/.


(2013, December 31). Bank tellers meet customers [Monograph]. Retrieved from http://woman.thenest.com/qualifications-bank-tellers-2243.html.