The cost of each alternative.

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Chapter 5, Problem 4FPE

Summary Introduction

To determine: The cost of each alternative.

Summary Introduction

To discuss: The recommendation of least costly option.

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Use Worksheet 5.3. Rachel and Alexander Harrison need to calculate the amount they can afford to spend on their first home. They have a comt annual income of $67,500 and have $37,000 available for a down payment and closing costs. The Harrisons estimate that homeowner's insurance property taxes will be $250 per month. They expect the mortgage lender to use a 30 percent (of monthly gross income) mortgage payment afford ratio, to lend at an interest rate of 6 percent on a 30-year mortgage, and to require a 10 percent down payment. Based on this information, use th home affordability analysis form in Worksheet 5.3 to determine the highest-priced home the Harrisons can afford. Assume that closing costs are o of the down payment. Round the answer to the nearest dollar.

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fill out the worksheet using the following information: Theoretical Housing Situation: Renting: Monthly Rent: $1,800 Renter’s Insurance: $200 per year Security Deposit: $2,000 After-tax Savings Rate: 5% Buying: Home Price: $250,000 Down Payment: $50,000 Loan Amount: $200,000 Loan Term: 25 years Interest Rate: 3.5% Property Taxes: 1.25% of the home price Homeowner’s Insurance: 0.4% of the home price Maintenance Costs: 1.5% of the home price Closing Costs: $5,000 After-tax Rate of Return: 4% Tax Rate: 25% Estimated Annual Appreciation: 2%