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Finance Chapter Project – “Buying A House”

MATH 1332, College Mathematics

Name

Instructions:

You are thinking about buying a house. To determine if this is feasible, you need to perform

some calculations. Make sure to show all of your work, especially how the formulas are set up.

You need to write something down for every part of each question.

Use these first four pages as a coversheet, and attach it to your project. Make sure your name is

on the top of the page. Each number has associated points listed with them.

NOTE: Up to 10 points may be deducted for work that is messy, disorganized, or difficult to read.

Your project should contain:

1) This coversheet

2) Documentation showing where you found your interest rates.

3) Documentation showing the details of the house(s) you are looking to buy.

4) Your work showing all of your calculations, including the formulas used to calculate

each amount. Write down each formula you use and then show the formula with all

of the variables filled in with the appropriate values.

5) This should also contain your paragraph about your decision.

REMEMBER TO READ ALL INSTRUCTIONS CAREFULLY. IF YOU HAVE ANY QUESTIONS,

OR SOMETHING IS NOT CLEAR TO YOU, ASK, I AM HAPPY TO HELP!

Let’s buy a house.

You need to save for a down payment. To find out how much you can save, you need to gather

some income and savings information.

Let’s start saving.

1) (3 points) What is your GROSS annual income? Every year, the U.S. Department

of Housing and Urban Development (HUD) publishes the median family incomes

(MFI) for various areas around the country. A chart with HUD figures is located in

D2L with this assignment. Let’s assume that you have graduated and you have just

landed a really good job. However, since you have little to no experience, your

income may be lower than average, so let’s choose 80% Median Income. Pick your

family size and use the income listed in the chart for the city/county where your

future home is located. (Remember, if you pick a larger family size, you will need to

choose a larger house to accommodate your family, so don’t just pick a family size

because it has a higher income figure). Make sure to indicate your family size

and county in your answer.

You can also visit the HUD webpage at:

https://www.huduser.gov/portal/datasets/il/il2018/select_Geography.odn

2) (3 points) You need to calculate your NET annual income. To keep things

simple, we will say that taxes will be 25% of your gross income. So, Gross

Income – (0.25 x Gross Income) ＝ Net Annual Income.

3) (3 points) Suppose you decide to save 10% of your NET MONTHLY income each

month. Find this amount.

4) (6 points) If you invest this money (amount from #3) each month in an account

that compounds monthly with an APR of 2.5%, how much will you have saved i)

after 1 year? ii) after 3 years?

How much can we afford?

Before you buy a house, you need to determine what you can afford.

5) (4 points) The bank will not approve your mortgage loan if your monthly payment is

greater than 28% of your GROSS MONTHLY income. Find the maximum amount

you can pay each month for your mortgage. Give a calculation to show that you can

afford your mortgage.

Let’s find a house to buy.

Now we get to the fun part. Happy house hunting!

6) (6 points) Find a house on the market. Remember that you need to have

enough space for the entire family (that does not mean that every child must

have his/her own room, but you can’t put grandma in with the kids! Just be

reasonable.) Print or cut out the advertisement to attach to your project.

NOTE: you should find a house, not a travel trailer, or other manufactured homes that are

mobile. These are a great financial alternative to the traditional house, however lenders

sometimes refuse to finance loans for these. Thus, we need to find a traditional house.

7) (3 points) Determine your down payment. For this project, select an amount that is

10% of the price of the home.

8) (3 points) Did your savings plan save enough for the down payment after 3 years?

If not, then decide how you will adjust your savings plan either by extending the

time you are saving or by increasing the amount each month to ensure you have

enough for the down payment.

9) (4 points) How much of the house must be financed, i.e., after you make your

down payment (answer to #7), how much of the cost of the house is still unpaid?

This is your loan amount.

Let’s finance this house.

10)(6 points) Find the rates of two fixed mortgages, one with a term of 30 years, and

one with a term of 15 years. Some lenders quote two different rates. Choose the

rate labeled APR. Once you have found your rates, print out documentation of

where you found your rates to attach to your project. Circle, highlight, or otherwise

indicate the rate you choose. (Note: Rates on some websites change daily. Print

out your documentation on the same day you choose the rate to make your

calculations.)

11)For the loan with the 30 year term, find the following:

a. (6 points) Calculate the monthly payment. (Show your work. You may

NOT use an online mortgage calculator.)

b. (4 points) Calculate the total amount paid for the loan. (Answer from part A

multiplied by 360)

c. (4 points) Calculate the total interest paid for the loan. (Answer from number 9

minus answer from part B)

12)For the loan with the 15 year term, find the following:

a. (6 points) Calculate the monthly payment. (Show your work. You may

NOT use an online mortgage calculator.)

b. (4 points) Calculate the total amount paid for the loan. (Answer from part A

multiplied by 180)

c. (4 points) Calculate the total interest paid for the loan. (Answer from number 9

minus answer from part B)

Additional monthly expenses.

BUT…the mortgage is not the only monthly cost you need to consider. You will also have to pay

property taxes and homeowner’s insurance for your house.

13)(5 points) The property taxes should be stated on the real estate listing of the

house. If not, try googling your property address to find another listing for the

same property, or you can try calling the realtor. Divide the amount of property

taxes by 12 to get your monthly tax payment.

14)(5 points) There are a number of things, such as size, age, number of stories, and

location that can affect the cost of homeowner’s insurance, but valuation of the

home for insurance purposes usually runs between $80 – $100 per square foot. To

calculate a rough estimate, divide the purchase price (not the loan amount!) of the

home by 1000 and multiply by $4. This gives you the annual premium. Divide by

12 to get your monthly insurance payment.

Conclusions

15)

a. (4 points) What is the total monthly payment on the 30 year loan, including

taxes and insurance?

b. (4 points) Is the monthly payment on the loan with the 30 year term within

your budget? If not, adjust your down payment, or find a cheaper house. If

you have to adjust your down payment, determine how you will adjust your

savings plan. If you need a cheaper house, print out the advertisement for

the new house and calculate the new monthly payment.

16)

a. (4 points) What is the total monthly payment on the 15 year loan, including

taxes and insurance?

b. (4 points) Is the monthly payment on the loan with the 15 year term within

your budget? If not, adjust your down payment, find a cheaper house, or

choose the 30 year term. If you choose to adjust your down payment or find

another house, then adjust your savings plan or find the new monthly

payment, respectively.

17)(5 points) Write a paragraph where you determine which loan is better for your

financial position. Explain IN DETAIL your reasons for making your decision. You

should address each of the following points. Which monthly payment will be easier to

make and still leave you with enough to live off of? Which loan costs less in the long

run? Are there any expenses not listed here that impact your decision?

2018 HUD median income for Texas counties

(following values taken from: https://sites.google.com/site/texasmortgagelimits/hud-median-income-limits)

2018 HUD median income limits – 80%