Question

1. Deciding to Buy. Dave and Diane Starr of New Orleans, Louisiana, both of whom are in their late 20s, currently are renting an unfurnished two-bedroom apartment for $1,200 per month, plus $230 for utilities and $34 for insurance. They have found a condominium they can buy for $170,000 with a 20 percent down payment and a 30-year, 6.5 percent mortgage. Principal and interest payments are estimated at $860 per month, with property taxes amounting to $150 per month and a homeowner's insurance premium of $900 per year. Closing costs are estimated at $4,200. The monthly homeowners association fee is $275, and utility costs are estimated at $240 per month. The Starrs have a combined income of $90,000 per year, with take-home pay of $5,800 per month. They are in the 25 percent tax bracket, pay $225 per month on an installment loan (ten payments left), and have $39,000 in savings and investments outside of their retirement accounts.

(d) Available financial information suggests that mortgage rates might increase over the next several months. If the Starrs wait until the rates increase 1/2 of 1 percent, how much more will they spend on their monthly mortgage payment?

N	30 x 12 = 360	30 x 12 = 360
I/Y	6.5 / 12 = 0.5417	7 / 12 = 0.5833
PV	170,000 x (1 - 0.20) = 136,000	170,000 x (1 - 0.20) = 136,000
PMT	CPT	CPT
FV	0	0
Total payments (PMT x 360)
Total financing costs (Total payments - PV)

Answer 1

Ans.

Total cost of house is $170,000

Total loan to be taken = 170,000 x (1 - 0.20) = $136,000

Current annual Interest rates = 6.5%, current monthly interest rate = 6.5% / 12= 0.5417%

number of monthly periods = 30 * 12 = 360

Monthly installment (payment) on loan = $860 (859.6)

If interest rate increases by 0.5% to 7%, Monthly interest rate = 7%/12 = 0.583%

using excel formula,

Monthly installment for new monthly interest rate of 0.583% =PMT(0.583%,360,-136000,0)

New Monthly payment = $904.8

Increase in monthly mortgage payment = 904.8 - 859.6

Increase in monthly mortgage payment = $45.2

They will have around $45 additionally on monthly mortgage payment if interest increase by 0.5% to 7%

N	30 x 12 = 360	30 x 12 = 360
I/Y	6.5 / 12 = 0.5417	7 / 12 = 0.5833
PV	170,000 x (1 - 0.20) = 136,000	170,000 x (1 - 0.20) = 136,000
PMT	CPT	CPT
FV	0	0
Total payments (PMT x 360)	859.6*360= 309,461	904.8*360= 325,732
Total financing costs (Total payments - PV)	(309,461-136,000) = 173,461	(325,732-136,000) = 189,732