Find a new or existing home that you would hypothetically like to buy. (Use any source you like: for example, realtor.com or zillow.com.) In order to make this more useful, you might focus on a house in an area where you think you might live someday. Also, think about a home in a price range that might be feasible for you in a few years. Show your work to receive partial credit for incorrect answers. (See the video, slides, and Excel file from the first 32 minutes of class on 10/28/24 to see two examples of this. You can also look at an Excel file with 3 examplesof these calculations.)
[Note: after ~9:00AM on Mon., Nov. 4, when the answer file is posted, new submissions will earn a maximum of 50% credit.]
Answer these 11 questions, and show some of your work for partial credit:
What is the address of the property?
What do you think the final sales price will be? (it’s up to you; you can agree to the asking price if you’d like!) This is the price to use as a starting point for the questions below.
How much money will you have to bring to closing to pay for CLOSING COSTS (including prepaids)? (Assume that closing costs and prepaids together total to 5% of the sales price)
How much money will you have to bring to closing to pay for the DOWN PAYMENT? (Assume that you make a 6% down payment that your lender requires)
How much will you have to bring to closing in total? (Add #3 and #4 together)
How much will the total mortgage amount be? (In other words, what will the loan amount or principal be? Hint: Note that in this exercise, you cannot borrow for closing costs or, by definition, the down payment. However, ONLY the down payment reduces the amount you are going to borrow.)
How much will your monthly payment be for just the principal and interest (a combined PMT number, or “PI”) for the loan? The loan will be a fixed-rate 30-year mortgage at 7.5% interest that will be compounded and paid monthly.
How much will your monthly property tax payments be, assuming a property tax rate equivalent to 2% of the home value each year? (Hint: use the property value, not the mortgage amount, to begin with, and be sure to convert to monthly amounts. These amounts are paid into your escrow account with your lender.)
How much will your monthly insurance payments be, assuming an insurance cost equivalent to 0.8% of the home value each year? (Hint: use the property value, not the mortgage amount, to begin with, and be sure to convert to monthlyamounts. These amounts are paid into your escrow account with your lender. Also pay attention to your decimal places; in this problem and for many people in Texas, your insurance payments should cost less than your property tax payments! However, that may be changing in the near future…)
Including all four PITI components, what will the full monthly mortgage payment be? (#7 + #8 + #9)
If your lender requires your monthly mortgage payment (PITI) to be no greater than 28% of your monthly gross income, and assuming that your other debt payments are small, what is the lowest annual gross income you could have and still purchase this house (according to your lender)?
(Hint: I can explain the algebra to you if you would like, but start with the answer from #10, multiply it by 12 to get your annual mortgage payment, and then divide that result by 0.28 to get the minimum annual gross income you would need.)