Coursework on Personal Finance: Renting and Buying Worksheet

Complete the Buy or Rent Your Next Home exercise on the Bank rate website:http://www.bankrate.com/calculators/mortgages/rent-or-buy-home.aspx

Respond to each of the following in a minimum of 50 words:

What was the recommendation?

What were the factors that led to that recommendation?

Do you agree or disagree with the recommendation? Why?

I received a recommendation to reconsider the purchasing a new home since I never have to access to a lump sum or anything in my savings. I totally agree with this suggestion because to get and begin paying the new home: there is need to be financially responsible. To have the income implies that I am ready to take the next step.

Consider how economic conditions affect your decision to buy or rent (for example interest rates, unemployment rate, and inflation).

Explain in a minimum of 100 words the main benefits and drawbacks of renting versus owning a home.

One of the main advantages of renting a house includes the lack of responsibility for any maintenance or repair of the home. As a renter, one is not responsible for any costs of maintenance and repair. Secondly, when you rent a house, it becomes easy to relocate as it will take less time and also less costly. However, one drawback of renting is lack of federal tax benefits since the renters are not eligible for any housing-related federal tax credits and deductions. On the other hand, buying a home may come with the advantage of building equity over time which may not be possible for renters. Similarly, buying of homes has various tax benefits including the Homestead Exemption and the Federal Tax Deductions. One major drawback of buying a home is the fact that the building of equity does not equate to automatic profit to the individual.

Review Exhibit 7-4 in Ch. 7, page 225 of Focus on Personal Finance.

Summarize in at least 100 words the steps in the home-buying process.

When beginning a process of purchasing a home, you will first want to identify your home ownership requirements, Stability of residence as well as a personalised location of living. Secondly, it will be necessary to find a property you can afford and then think about the cost, select the right mortgage, and also examine the credit report. Next, after finding the home, it will be vital to make an offer through a qualified estate agent. Thirdly, one should organize a solicitor and surveyor who will work on the legal works. Fourthly, one should finalise the offer and mortgage upon the completion of the survey before completing the last stage of signing and exchanging contracts.

Review Exhibit 7-6 in Ch. 7, page 230 of Focus on Personal Finance.

Estimate the affordable monthly mortgage payment, the affordable mortgage amount, and the affordable home purchase price for the following situation. Show your calculations in the table below.

Monthly gross income: $2,950

Other Debt, monthly payment: $160

Down payment to be made: 15% of purchase price

Monthly property tax and insurance: $210

30-year mortgage at 6%

Enter your calculation and response in this column.

Step 1.Start with the monthly gross income. $2,950

Step 2. Multiply Step 1 by .33 (which is the decimal form of 33%) for a PITI (principal, interest, taxes, and insurance) guideline. 0.33 X 2,950 = 973.5

Step 3. Subtract Other Debt payments from the result of Step 2 to determine the Affordable Monthly Mortgage Payment. 973.5 160 = 813.5

Step 4. Divide the result of Step 3 by 6.00 (this is the mortgage payment factor from Exhibit 7-7 based on a 30-year loan at 6%) and then multiply this by $1,000.

This is the Affordable Mortgage Amount.

Note: Does this amount seem reasonable for this scenario? If not, double-check your calculations. 813 / 6 = 135.5

Step 5. Divide the affordable mortgage amount by .85 (This is 1 minus the down payment percentage) to determine the Affordable Home Purchase.

Note: Does this amount seem reasonable for this scenario? If not, double-check your calculations. 15,509

If you were buying a home valued at $215,000, what is the minimum down payment you would need in order to avoid paying private mortgage insurance (PMI)?PMI is requested to protect the lender from potential default loss when there is insufficient equity in a home.

The most obvious way to avoid payment of private mortgage insurance (PMI) is to make a downpayment of 20% or more. Therefore, the minimum down payment I will need is 20% of $214,500, which is $42,900.

Debt payments-to-income ratios will likely be considered as you apply for a mortgage. The Focus on Personal Finance text suggests keeping this ratio below 20%. A mortgage lender will have their own ratio for all debt payments, including mortgage-to-income ratio, before they will consider approval. Using this information, answer the questions and show your calculations in the table below:

Net monthly income: $4,000

Expected full mortgage payment (PITI): $1,000

Student loan payment: $250

Car payment: $300

Enter your calculation and response in this column.

What is this persons debt payments-to-income ratio? (550/4000) X 100 = 13.75%

What is this persons debt payments-to-income ratio when the full mortgage payment is included? (1550/4000) X 100 =38.75%

If the mortgage lender required total payment to income ratio below 40%, would this person meet that standard? Yes, because the total payment to income ratio is below 40%

If the mortgage lender required total payment to income ratio below 45%, what is the maximum monthly payments this person could have to meet the standard? (X/4000) X 100 = 40

100x = 160000

= $1,600