Chapter 8, Problem 9DC2

Summary Introduction

Case summary:

S has just received a raise and now thinking about purchasing a home. Purchasing a home will help him in itemizing his expenses which are now in the 25% tax bracket. He earns $63,000 a year. His expenses include a renter’s insurance premium of $150 per year, $450 monthly lease payment and student loan monthly repayment of $150. His security deposit of 2 months’ rent is earning 8% per annum. He did some research and find out about the cost related to real estate tax, insurance policy cost and maintenance cost. The value of the property will increase because of this; he wants to buy a home. Property prices have been rising at 5% over the last seven years. His concerns are about the closing cost and the down payment amount.

Character in the case:

S.

Adequate information:

S is in 25% tax bracket.

Annual salary is $63,000.

Rent is $900 per month.

Renter’s insurance premium is $150 per year.

Monthly bill of student loan is $150.

Real estate tax rate is $0.91 per $1,000.

Homeowner’s insurance policy cost is $275 per year.

Estimated maintenance cost is $350 per year.

Origination fee is 1% of house value.

Real estate commission is 6% of the purchase price.

Down payment is 20% of house price.

2 month’s security deposit return rate is 8%.

To determine:

Type of mortgage suitable for S and whether he considers interest only mortgage or not.