Estimate the affordable mortgage and purchase price

Assignment Help Finance Basics
Reference no: EM1363124

Kim and Dan Bergholt are both government workers. They are considering purchasing a home in the Washington D.C. area for about $280,000. They estimate monthly expenses for utilities at $220, maintenance at $100, property taxes at $380, and home insurance payments at $50. Their only debt consists of car loans requiring a monthly payment of $350.

Kim's gross income is $55,000/year and Dan's is $38,000/year. They have saved about $60,000 in a money market fund on which they earned $5,840 last year. They plan to use most of this for a 20% down payment and closing costs. A lender is offering 30-year variable rate loans with an initial interest rate of 8% given a 20% down payment and closing costs equal to $1,000 plus 3 points.

Before making a purchase offer and applying for this loan, they would like to have some idea whether they might qualify.

Estimate the affordable mortgage and the affordable purchase price for the Bergholts.
Suppose they do qualify; what other factors might they consider before purchasing and taking out a home mortgage?
What future changes might present problems for the Bergholts?
The real estate agent tells the Bergholts that if they don't care to purchase, they might consider renting. The rental option would cost $1,400/month plus utilities estimated at $220 and renter's insurance of $25/month. The Bergholts believe that neither of them is likely to be transferred to another location within the next five years. After that, Dan perceives that he might move out of government service into the private sector. Assuming they remain in the same place for the next five years, the Bergholts would like to know if it is better to buy or rent the home. They expect that the price of housing and rents will rise at an annual rate of 3% over the next five years. They expect to earn an annual rate of 5% on the money market fund. All other prices, including utilities, maintenance, and taxes are expected to increase at a 3% annual rate. After federal, state, and local taxes, they get to keep only 55% of a marginal dollar of earnings.

Estimate whether it is financially more attractive for the Bergholts to rent or to purchase the home over a five-year holding period. (Assuming the contract interest rate of 8%, monthly interest payments over the five-year period would total $87,574.)

Suppose it turns out that they have to relocate after one year. Which is the preferred alternative after one year? (Interest payments over the first year would equal $17,852.)

 

Reference no: EM1363124

Questions Cloud

Which job gives higher purchasing power of bundle of goods : If you have been offered $137,000 for a job in Los Angeles and $117,000 for a similar job in Dallas, which job gives you the higher purchasing power of the bundle of goods in the price index.
Analysis for factory and dealership locations : Analysis for Factory and Dealership Locations - An automobile company is trying to evaluate where to locate its factory and dealerships in a country.
Explain and elaborate with support of theory : Explain and Elaborate with support of theory and examples why Henry Mintzberg's managerial categories
What is the angle : What is the angle. The velocity of a particle moving in the xy plane is given by = (5.5t - 4.5t2)i + 8.3j
Estimate the affordable mortgage and purchase price : Kim and Dan Bergholt are both government workers. They are planning purchasing a home in the Washington D.C. area for about $280,000. They estimate monthly expenses for utilities at $220,
Show control chart and standard deviations : Establish a control chart for monitoring the average weights of the bowling balls in which the upper and lower control limits are each two standard deviations from the mean. What are the values of the control limits?
Recommendations of the food guide pyramid : In thinking about your typical daily diet, how does it compare with the recommendations of the Food Guide Pyramid?
Create relational schema of database in 3nf : A Relational schema of your database in 3NF, clearly indicating attributes, the data type of each attribute, primary and foreign keys, candidate keys, and which attributes are nullable, giving reasons. List any assumptions you need to make.
Explai how monopoly on boat sales in the region : Homer's boat manufacturing has a monopoly on boat sales in the region. Homer's marginal cost of the 8th boat produced is $1,200. He produces only eight boats and can sell all eight boats for $1,500. The elasticity of demand at this price is -2. Is..

Reviews

Write a Review

 

Finance Basics Questions & Answers

  Calculating sustainable growth rate

You've collected the following information about Odyssey, Inc.:

  Plan to construct an investment portfolio

Determine how you plan to create an investment portfolio. What steps do you plan to undertake to create your portfolio? How do you plan to weight the portfolio? How do you plan to account for risk?

  Explain valuation of bond for different ytms

Explain Valuation of bond for different YTMs compute the current price of the bonds if the present yield to maturity is 6 percent and 12 percent

  Fixed price contract and a target price contract

Assume someone tells you the only thing that matters is cost when deciding to provide a good or service internally or externally. That is, if you can do it cheaper internally, then that is how it should be done.

  Determining the effective interest rate

On August 1, 201, Colombo, Co's treasurer signed a note promising to pay $240,000 on December 31, 2010. Compute the effective interest rate (APR) on loan.

  Explain what is quartzs reservation price

Explain what is Quartz's reservation price and describe what is New Leasing Company's reservation price?

  Calculate the implicit cost

Compute the implicit cost of carrying an ounce of gold and the implied storage cost per ounce of gold if the current spot price of gold per ounce is $425.00,

  Calculation of portfolio return and variance

Calculation of portfolio return and variance and standard deviation Use the Solver function in Excel to suggest different combinations of equity that will either provide the same return for less risk

  Calculate the down payment value

Suppose you want to purchase a Car that costs $40,000. You want to finance as much of the purchase as possible with a 5-year bank loan at 12 percent compounded monthly,

  Convertible debt-project evaluation and bankruptcy

What are the benefits and costs of placing the financially troubled company Bankruptcy proceeding? Is this a legitimate and ethical vehicle for management to employ for the benefit of company's stakeholders?

  Calculate the value of the option

The opportunity to invest in a project can be thought of as a 3 year real option that is worth $450 million with an exercise price of $700 million.

  Determine cost of a bookcase

The cost of a bookcase was $70.00. Overhead associated with the bookcase was $10.00. Markup on the bookcase was 80 percent of cost. The merchant marked the bookcase down by 25 percent for a sale.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd