Financial Financing Concept Check
ANSWERS TO CONCEPT CHECKS, FINANCIAL PLANNING PROBLEMS
AND QUESTIONS, AND CASES
Concept Check 7-1 (p. 186)
1. What are the main benefits and drawbacks of renting a place of residence?
Advantages of renting are mobility, fewer responsibilities, and lower initial costs. Disadvantages are few financial benefits, restricted lifestyle, and legal concerns.
2. Which components of a lease are likely to be most negotiable?
Some people will tell you that just about everything in a lease is negotiable; however, certain things are likely to be more flexible than others. Most negotiable items include rent, amount of security deposit, starting date of lease, and decorating
3. For the following situations, would you recommend that the person …show more content…
rent of buy their housing? (Circle your answer)
A person who desires to reduce income taxes paid
rent
buy
A person who expects to be transferred for work soon
rent
buy
A person with few assets for housing expenses
rent
buy
Concept Check 7-2 (p. 191)
1. What are the advantages and disadvantages of owning a home?
The advantages of owning a home are pride of ownership, financial benefits, and lifestyle flexibility. Disadvantages are financial uncertainty, limited mobility, and higher living costs.
2. What guidelines can be used to determine the amount to spend for a home purchase?
In general, a person should make payments on the purchase of a home that involve about 25 to 30 percent of his or her income. This is a guideline and could be influenced by other factors such as the amount available for a down payment and other household expenses.
3. How can the quality of a school system benefit even homeowners in a community who do not have school-age children?
The quality of a school system is an important factor affecting home prices in a community. By maintaining quality schools, all homeowners in an area benefit from stable and increasing property values.
Concept Check 7-3 (p. 198)
1. What are the main sources of money for a down payment?
The main sources of a down payment are personal savings, pension plan funds, investments, and assistance from relatives.
2. What factors affect a person’s ability to qualify for a mortgage?
The major factors that affect mortgage affordability are income, other debts, the amount available for a down payment, the length of the loan, and current mortgage rates.
3. How do changing interest rates affect the amount of mortgage a person can afford?
As interest rates decline, home buyers can afford to take on a larger mortgage.
4. Under what conditions might an adjustable-rate mortgage be appropriate?
An adjustable rate mortgage may be appropriate when interest rates are relatively high and they are expected to decline. This situation would benefit the borrower as rates decline, or the homeowner may refinance when rates drop at a lower-rate, fixed-rate mortgage.
5. For the following situations, select the type of home financing action that would be most appropriate:
a. FIXED-RATE: A mortgage for a person who desires to finance a home purchase at current interest rates for the entire term of the loan.
b. REFINANCE: A homebuyer wants to reduce the amount of monthly payments since interest rates have declined over the past year.
c. HOME EQUITY LOAN: A homeowner wants to access funds that could be used to remodel the home.
d. V-A MORTGAGE: A person who served in the military, who does not have money for a down payment.
e. REVERSE MORTGAGE: A retired person who wants to obtain income from the value of her home.
Concept Check 7-4 (p. 200)
1. What actions are recommended when planning to sell your home?
When planning to sell your home, make needed repairs, consider new paint, clear out living and storage areas, and remove unnecessary furniture and other items.
2. What factors affect the selling price of a home?
Home prices are affected by location, size, condition, features, and current market demand.
3. What should you consider when deciding whether to sell your home on your own or use the services of a real estate agent?
If you decide to sell by owner, you will need to price, advertise, and show the house. Some people would like to save money by taking on these tasks and not use a real estate agent. If you would like someone else to handle these and other duties, you may decide to use the services of a real estate agent.
FINANCIAL PLANNING PROBLEMS AND QUESTIONS (p. 202)
1. What do you believe are the most important factors a person should consider when selecting housing?
Student answers will vary. Encourage students to consider both their financial situation and personal factors.
2. Based on the following data, would you recommend buying or renting?
Rental Costs
Buying Costs
Annual rent, $7,380
Annual mortgage payments, $9,800 ($9,575 is interest)
Insurance, $145
Property taxes, $1,780
Security deposit,
$650
Down payment/closing costs, $4,500
Insurance/maintenance, $1,050
Growth in equity, $225
Estimated annual appreciation, $1,700
Assume an after-tax savings interest rate of 6 percent and a tax rate of 28 percent.
Rental Costs
Buying Costs
$7,380
Rent
$9,800
Mortgage payments
145
Insurance
2,830
Taxes, insurance, maintenance
39
Interest lost on security deposit
270
Interest lost on down payment, closing costs
$7,564
Total rental costs
-225
Growth in equity
-1,700
Annual appreciation
-2,681
Tax savings for mortgage interest
-498
Tax savings for property taxes
$7,796
Total buying costs
3. When Mark and Valerie Bowman first saw the house, they didn’t like it. However, it was a dark, rainy day. They viewed the house more favorably on their second visit. Despite cracked ceilings, the need for a paint job, and a kitchen from the 1970s, the Bowmans saw a potential to create a place to call their own. How could the Bowmans benefit from buying a home that needed improvements?
Buying a home that needs improvement can make sense for two reasons. First, it may be the only affordable choice, and the buyer may be willing to fix up the residence. Second, the location or style may be exactly what is desired and improvements a tradeoff that must be made.
4. Estimate the affordable monthly mortgage payment, the affordable mortgage amount, and the affordable home purchase price for the following situation (see Exhibit 7–6).
Monthly gross income, $2,950
Down payment to be made—15 percent of purchase price
Other debt (monthly payment), $160
Monthly estimate for property taxes and insurance, $210
30-year loan at 8 percent
Based on example A (with other debts), Exhibit 7-6 (p. 192)
Affordable monthly mortgage payment, $751
Affordable mortgage amount, $102,316
Affordable home purchase, $120,372
5. Based on Exhibit 7–7, what would be the monthly mortgage payments for each of the following situations?
A $40,000, 15-year loan at 11.5 percent
$11.68 40 = $467.20
A $76,000, 30-year loan at 9 percent
$ 8.05 76 = $611.80
A $65,000, 20-year loan at 10 percent.
$ 9.65 65 = $627.25
6. Which mortgage would result in higher total payments?
Mortgage A: $985 a month for 30 years
Mortgage B: $780 a month for 5 years and $1,056 for 25 years
A: $985 360 months = $354,600
B: ($780 60 months) + ($1,065 300 months) = $366,300
7. Kelly and Tim Jones plan to refinance their mortgage to obtain a lower interest rate. They will reduce their mortgage payments by $56 a month. Their closing costs for refinancing will be $1,670. How long will it take them to cover the cost of refinancing?
$1,670 $56 = 29.82 (about 30 months; two and a half years)
8. Conduct a web search for actions to take when selling your home.
Have students prepare a list of suggestions that would enhance the sale of a home.
INTERNET CONNECTION
Comparing Mortgage Rates Online (p. 203)
After obtaining this data, students should be able to discuss the current level of mortgage rates.
CASE IN POINT (p. 204)
Can You Buy a House Online?
1. How has technology changed the home-buying process?
Computer systems and other technology have made it possible to gather information, view homes, compare mortgage rates, apply for a mortgage, and negotiate price online.
2. Based on information at www.homefair.com, describe some advice to help a person buying a home.
Answers will vary; students should offer specific information that could be useful during the home buying process.
3. What might be some concerns with online homebuying activities? Based on a Web search to obtain additional information on electronic home buying, what other advice would you offer when using the Internet for various phases of the home-buying process?
Security of personal information, online scams, and other deceptive business practices are possible drawbacks of online home buying. Ask students to list various websites that might be useful for various aspects of home buying.
AND QUESTIONS, AND CASES
Concept Check 7-1 (p. 186)
1. What are the main benefits and drawbacks of renting a place of residence?
Advantages of renting are mobility, fewer responsibilities, and lower initial costs. Disadvantages are few financial benefits, restricted lifestyle, and legal concerns.
2. Which components of a lease are likely to be most negotiable?
Some people will tell you that just about everything in a lease is negotiable; however, certain things are likely to be more flexible than others. Most negotiable items include rent, amount of security deposit, starting date of lease, and decorating
3. For the following situations, would you recommend that the person …show more content…
rent of buy their housing? (Circle your answer)
A person who desires to reduce income taxes paid
rent
buy
A person who expects to be transferred for work soon
rent
buy
A person with few assets for housing expenses
rent
buy
Concept Check 7-2 (p. 191)
1. What are the advantages and disadvantages of owning a home?
The advantages of owning a home are pride of ownership, financial benefits, and lifestyle flexibility. Disadvantages are financial uncertainty, limited mobility, and higher living costs.
2. What guidelines can be used to determine the amount to spend for a home purchase?
In general, a person should make payments on the purchase of a home that involve about 25 to 30 percent of his or her income. This is a guideline and could be influenced by other factors such as the amount available for a down payment and other household expenses.
3. How can the quality of a school system benefit even homeowners in a community who do not have school-age children?
The quality of a school system is an important factor affecting home prices in a community. By maintaining quality schools, all homeowners in an area benefit from stable and increasing property values.
Concept Check 7-3 (p. 198)
1. What are the main sources of money for a down payment?
The main sources of a down payment are personal savings, pension plan funds, investments, and assistance from relatives.
2. What factors affect a person’s ability to qualify for a mortgage?
The major factors that affect mortgage affordability are income, other debts, the amount available for a down payment, the length of the loan, and current mortgage rates.
3. How do changing interest rates affect the amount of mortgage a person can afford?
As interest rates decline, home buyers can afford to take on a larger mortgage.
4. Under what conditions might an adjustable-rate mortgage be appropriate?
An adjustable rate mortgage may be appropriate when interest rates are relatively high and they are expected to decline. This situation would benefit the borrower as rates decline, or the homeowner may refinance when rates drop at a lower-rate, fixed-rate mortgage.
5. For the following situations, select the type of home financing action that would be most appropriate:
a. FIXED-RATE: A mortgage for a person who desires to finance a home purchase at current interest rates for the entire term of the loan.
b. REFINANCE: A homebuyer wants to reduce the amount of monthly payments since interest rates have declined over the past year.
c. HOME EQUITY LOAN: A homeowner wants to access funds that could be used to remodel the home.
d. V-A MORTGAGE: A person who served in the military, who does not have money for a down payment.
e. REVERSE MORTGAGE: A retired person who wants to obtain income from the value of her home.
Concept Check 7-4 (p. 200)
1. What actions are recommended when planning to sell your home?
When planning to sell your home, make needed repairs, consider new paint, clear out living and storage areas, and remove unnecessary furniture and other items.
2. What factors affect the selling price of a home?
Home prices are affected by location, size, condition, features, and current market demand.
3. What should you consider when deciding whether to sell your home on your own or use the services of a real estate agent?
If you decide to sell by owner, you will need to price, advertise, and show the house. Some people would like to save money by taking on these tasks and not use a real estate agent. If you would like someone else to handle these and other duties, you may decide to use the services of a real estate agent.
FINANCIAL PLANNING PROBLEMS AND QUESTIONS (p. 202)
1. What do you believe are the most important factors a person should consider when selecting housing?
Student answers will vary. Encourage students to consider both their financial situation and personal factors.
2. Based on the following data, would you recommend buying or renting?
Rental Costs
Buying Costs
Annual rent, $7,380
Annual mortgage payments, $9,800 ($9,575 is interest)
Insurance, $145
Property taxes, $1,780
Security deposit,
$650
Down payment/closing costs, $4,500
Insurance/maintenance, $1,050
Growth in equity, $225
Estimated annual appreciation, $1,700
Assume an after-tax savings interest rate of 6 percent and a tax rate of 28 percent.
Rental Costs
Buying Costs
$7,380
Rent
$9,800
Mortgage payments
145
Insurance
2,830
Taxes, insurance, maintenance
39
Interest lost on security deposit
270
Interest lost on down payment, closing costs
$7,564
Total rental costs
-225
Growth in equity
-1,700
Annual appreciation
-2,681
Tax savings for mortgage interest
-498
Tax savings for property taxes
$7,796
Total buying costs
3. When Mark and Valerie Bowman first saw the house, they didn’t like it. However, it was a dark, rainy day. They viewed the house more favorably on their second visit. Despite cracked ceilings, the need for a paint job, and a kitchen from the 1970s, the Bowmans saw a potential to create a place to call their own. How could the Bowmans benefit from buying a home that needed improvements?
Buying a home that needs improvement can make sense for two reasons. First, it may be the only affordable choice, and the buyer may be willing to fix up the residence. Second, the location or style may be exactly what is desired and improvements a tradeoff that must be made.
4. Estimate the affordable monthly mortgage payment, the affordable mortgage amount, and the affordable home purchase price for the following situation (see Exhibit 7–6).
Monthly gross income, $2,950
Down payment to be made—15 percent of purchase price
Other debt (monthly payment), $160
Monthly estimate for property taxes and insurance, $210
30-year loan at 8 percent
Based on example A (with other debts), Exhibit 7-6 (p. 192)
Affordable monthly mortgage payment, $751
Affordable mortgage amount, $102,316
Affordable home purchase, $120,372
5. Based on Exhibit 7–7, what would be the monthly mortgage payments for each of the following situations?
A $40,000, 15-year loan at 11.5 percent
$11.68 40 = $467.20
A $76,000, 30-year loan at 9 percent
$ 8.05 76 = $611.80
A $65,000, 20-year loan at 10 percent.
$ 9.65 65 = $627.25
6. Which mortgage would result in higher total payments?
Mortgage A: $985 a month for 30 years
Mortgage B: $780 a month for 5 years and $1,056 for 25 years
A: $985 360 months = $354,600
B: ($780 60 months) + ($1,065 300 months) = $366,300
7. Kelly and Tim Jones plan to refinance their mortgage to obtain a lower interest rate. They will reduce their mortgage payments by $56 a month. Their closing costs for refinancing will be $1,670. How long will it take them to cover the cost of refinancing?
$1,670 $56 = 29.82 (about 30 months; two and a half years)
8. Conduct a web search for actions to take when selling your home.
Have students prepare a list of suggestions that would enhance the sale of a home.
INTERNET CONNECTION
Comparing Mortgage Rates Online (p. 203)
After obtaining this data, students should be able to discuss the current level of mortgage rates.
CASE IN POINT (p. 204)
Can You Buy a House Online?
1. How has technology changed the home-buying process?
Computer systems and other technology have made it possible to gather information, view homes, compare mortgage rates, apply for a mortgage, and negotiate price online.
2. Based on information at www.homefair.com, describe some advice to help a person buying a home.
Answers will vary; students should offer specific information that could be useful during the home buying process.
3. What might be some concerns with online homebuying activities? Based on a Web search to obtain additional information on electronic home buying, what other advice would you offer when using the Internet for various phases of the home-buying process?
Security of personal information, online scams, and other deceptive business practices are possible drawbacks of online home buying. Ask students to list various websites that might be useful for various aspects of home buying.