The Finance project

Worth 100 points

Project: Buying a house five years after graduation. Can you do it?

The project will use the information and formulas from “Consumer Math” to determine if you would be
approved for a house. The project is requiring YOU to do the calculations using the formulas from our
finance chapter: sinking funds, annuities, amortization loans, compound interest.

This is a research paper. You are doing the research about buying a house. You are using the guidelines
given from this course to decide if you can afford the house. Reasons such as: “the calculator online,”
“the bank officer,” or “the agent” are not acceptable answers as to whether you can afford the house.
You are doing the research and seeing if you meet the standard requirements. All rates, values, etc. must
be documented. If information from a source is given in person, have the person write out the
information with his/her signature. If you get quotes and/or rates online, print a copy of the information
and include it in the paper. All research and information must have documentation attached that the
reader can plainly see without doing any research.

This is a paper. All English rules and research paper guidelines must be followed. It must have an
introduction paragraph with a thesis sentence. The body should be well organized and all information
should be contained in the body of the paper. Show your actual calculations in detail (“showing work”)
in the appendix of the paper. For these calculations, you must either use Equation Editor in Microsoft
Word or neatly write your equations by hand in ink. While multiple assignments are required to lead to
this final project, this project is not a series of assignments: it is a paper. The conclusion should be 1 to
3 paragraphs. Your paper needs to contain a bibliography.

Doing research

In this project, you will investigate the process of buying a house. In order to make it as accurate as possible, you
will need to contact banks and real estate agencies in order to “buy” your house. You should do some research in
the newspaper and/or on the internet before contacting banks and real estate agents. When talking to people from
these offices, you should keep some courtesies in mind:

• Let them know you are working on a project for a class you are taking and not actually in the market for a
house. Some businesses pay their employees on commission, so they may not appreciate it if they think
you are wasting their time. Others will gladly help you out. Be sure to be up front with them so they
have the option of whether or nor they want to help you.
• Try to choose a time when their offices are not busy. Morning and afternoons are probably good;
weekends and lunch hours are probably not good times.

What you need to do:

1. Assume that you plan on buying a house in five years after your graduation. For the purpose of this project,
you should assume you are ready to graduate now. Make an educated estimate of your salary in five years.
In order to do this you will need to have a job title that describes what you think you might be doing in five
years. Indeed this will involve some guesswork, but you can probably find the starting salary for this
particular profession and then adjust this number for inflation. The Career Services Office (Student Union
at UA) may have some resources that will be helpful. There are likely to be websites that would also be
useful. If you are currently employed in the profession of your choice, estimate what your salary would be
in five years.
2. You will need to approximate how much money you can save towards a down payment in the next five
years. Be realistic. Most people can only realistically save about 5% of their salary each year.
3. Remember you will be paying federal, state and social security taxes. You will need to deduct these
amounts from your salary before you can make any estimates about how much can be saved towards the
down payment.
4. You need to come up with a realistic budget so you can project how much you can save over the five year
time period. You will find how much you can save each month and assume that you will be depositing this
money in a sinking fund. Calculate what this sinking fund is worth in 5 years. Need to find a saving interest
rate for this sinking fund.
5. Following the guidelines discussed in the finance booklet and in class, find a house in your price range.
You can look in newspapers ads, contact real estate agents, etc. Remember real estate agents work on
commission. Many large realtors have websites where they showcase homes. This is likely to be a good
starting place.
6. Begin by looking in the Sunday paper in the Real estate or Home section. There will be ads in this section
from lending institutions stating their current mortgage rates and other pertinent information. This
information is also available on websites.
7. Now you need to take out a loan to buy the house. Using your estimates for future earnings and savings,
talk to a loan agent to see if you would be able to take out a loan on this house. You need to discuss interest
rates as well as the duration of the loan. Do not forget to find out about loan origination fees, discount
charges, closing costs, and requirements for down payments.
8. House payment will include homeowners insurance and property tax. You will need to pay insurance and
taxes. A bank should be able to give you an estimate of what the monthly taxes and insurance will be. At
the end, you should end up with a figure for your monthly housing expenses.

To turn in:

The following bullet points are what need to be included with the turned in project. The numbered entries give
more details of what is expected in your project. Remember you are writing a paper which needs to have an
introduction and a conclusion. Even though these points are numbered that does not mean that this is how your
paper should be formatted.

• A short paper (2 to several pages) discussing how you researched this assignment. The length is not the
object. The inclusion of all the information is the object. Included in this section should be a discussion
of the types of mortgages available (fixed and adjustable) and why you decided to get the one you ended
up choosing. Included in the paper you should cite all references. This includes any banks, realtors (and
the names of the individuals you received information from), websites and newspapers. Be sure to make
a printed copy for each reference, including for every value you cite in the paper.
• The Multiple Listing Service (MLS) picture of your home.
• An annotated sheet of figures. Next to every figure, you should write a short sentence explaining what
the figure represents. Please word process when commenting on your calculations and be sure that you
make it clear what your calculations mean. The formulas themselves can be hand written but they must
be neat, legible and written in ink.
• The final result of your project should be a loan with regular monthly payments that can be met by your
future salary. You should also include a page that lists all the applicable closing costs with a description
of what each of these costs represents. If it turns out that you cannot buy a house on your future salary
then you should explain why not.

The following information needs to be included in your paper. This is not necessarily a conclusive list of what
needs to be in the project. The following information must be included for a decent grade. Just because you do
include all of the following you are not guaranteed a perfect score. This is a paper and there are points involved
for writing style, organization and a demonstrated understanding of the project.
Finance Outline:

1. Find a career that is realistically obtainable. Find the starting salary for that job and make realistic
projections with regards to your salary for five years after graduation.
2. Find your starting salary and 5-year salary. State your yearly and monthly gross income.
 3. Make a tentative monthly budget for the five years after graduation. This is using your starting salary.
You don’t have to make a budget for each year—just the first year.
a. Estimate taxes (federal, state, local and social security taxes that will be deducted from your pay) by
25% of your income if under $75,000 a year and 30% of your income if your income is over $75,000
a year. Subtracting this from your gross gives your net income.
b. This should include rent, utilities, food, car loans, insurance, student loans, entertainment, clothing, etc.
Be sure to remember that the miscellaneous category should be between 25 and 30% of your salary.
For example, your car will need repairs and new tires during this period. There are always several
expenses that we do not anticipate but must be prepared for.
4. Starting salary minus your budget, which includes the taxes paid, is realistic projection of how much you
can save toward a down payment for your house. This amount should be no more than 5-10% of your net
pay. If it exceeds this amount, you should either check your budget items to see if you forgot something
or give a good explanation of why you think you can save this amount.
5. Making a monthly deposit into an annuity account, you will need to compute how much money you will
have saved in 5 years. You must find a savings interest rate.
6. Now that you have an estimate of projected savings, you need to start researching buying the home. First
start with the affordability guidelines to decide how much of a house you will be able to afford. Think
about down payment and annual salary.
7. Once you have ascertained how much you can afford to spend on a home, you can start looking for a
home through the internet or talking to a real estate broker.
8. After you have found a home, you need to decide whether you are going to finance the home using a
fixed or adjustable rate mortgage. You should discuss these options in your paper and your reasons for
making the decision that you finally make. You must get a loan interest rate.
9. You also need to find the closing costs which need to be itemized. A dollar approximation of the closing
costs is not acceptable. You need to include the details. You can get this at the same financial institution
where you got your loan interest rate. The interest rate helps determine the closing cost.
10. The amount needed in 5 years is: the required down payment (20%) plus closing costs. Does your
savings meet this? Calculate what is required per month to be placed into savings in order to reach this
goal.
11. Now you need to find out property taxes, insurance, association fees (if they exist) and private mortgage
insurance.
12. Now verify affordability using the three guidelines in “Consumer Math”.

Additional information about the project

For this report, you must show the calculations using a standard down payment of 20%. Once the calculations are done, you
may modify the down payment, if need be.

The main project: Will the bank approve this loan? If yes, you can afford the house. If no, you can’t afford the house.
3 requirements: Does the house meet the 2 loan requirements found in section 6.4? Do you enough money saved to pay for
closing and down payment costs? Here are three REQUIREMENTS:
R1. Price of the house is no more than 3 times the annual salary (5- year salary) [This is required. 2 times the salary is better!]
R2. Monthly house payment is less than 25% of the monthly gross income (5-year salary).
R3. Down payment and closing costs are covered by your savings. Can you save the money in 5-years to meet this amount?

If the loan is not approved, explain why and give some options (with the calculations).
1. If it is because of requirement 2: (a) recalculate the using the maximum house payment.
(Show what the new down payment would be required) and/or (b) what is the annual income required for this monthly house
payment and is it obtainable with a few years?
2. If it is because of requirement 3: (a) Using a lower amount for the down payment (the amount saved – closing cost =
new down payment). Recalculate the monthly payments on this loan. You must purchase mortgage insurance (when down
payment is less than 20%), which is added to your monthly house payment. Recalculate the house payment. With the new
figures, will the bank approve the loan? (b) Recalculate the annuities by saving for one or two more years before buying the
house. (c) How much of a lump sum is needed in order to have the required amount at the time of closing? (Money needed at
closing minus saved amount = additional money needed) How much would you have to put into savings immediately when
you graduate in order for it to grow to reach the additional money required in 5 years?
Items you must find in order to do the project
• Must find and calculate your Federal, state and local income tax, using starting salary
• Must do a realistic budget (based on your job)
• Must find a current savings or money market interest rate (down payment saving)
• Must find a current loan interest rate (loan rate of the house payment)
• Must find the origination fee
• Must find discount charges if any
• Must find the property taxes per year on this property
• Must find an estimate of the homeowners insurance per year
You must state in your report where all the documentations for the items above are located.

This project is for you to use the formulas and information from the finance chapter to calculate what it will take to buy a
house. You must do all the calculations. Use the formulas and information in the book to do this project.

Understand that you will start saving now (starting salary) and 5 years later you are planning to purchase a house (salary in 5
years). Savings for the down payment calculations will be based on your starting salary. The purchase price and monthly
mortgage payments will be based on your salary in 5 years.

Remember, this project is a paper, or a report. All information is in the report—only the calculations (equations) are put in
the appendix. In other words, I should not have to read the appendix to get any information (Rent, budget, taxes, interest rate,
years, loan, monthly payments, annual or monthly property taxes, etc.), only to see how some calculations were made. The
above eight assignments in bullets are the calculations needed for the paper; they are not the only things to be included in
your report or the order in which to organize your paper. Your paper should have an introduction, a body, and a closing.

Do you meet Requirement R3 above? In other words, have you saved enough for a down payment?
a. Look at your expenses per month (estimate) and estimate how much you can save per month
Use an annuity formula to see how much you will have saved in 5 years.
b. Once you found a house, calculate the standard down payment needed
Use the sinking fund formula to calculate what you need to save each month.
You must compare a and b.

Make sure you include the following, along with the other information listed on page 1-4:
Title and cover sheet
An introduction and a conclusion
As part of your conclusion, you should answer the question, “Will the loan be approved?”
Here you will actually summarize the 3 requirements and explain if you meet the requirements or not.

All calculations, formulas, and actual work should appear the appendix, with one exception: in the conclusion, show
your calculation that answers whether or not you meet the 3 criteria for the loan to be approved. Include this work in
the body of the paper in your conclusion.

There are many other calculations you can include in your paper. That may be helpful for the reader. Here are a 2 you may
want to consider:
how much money you invested in for the down payment, and the interest earned
how much money you must pay into the loan, and the interest paid

How to include the calculations in the paper

The paper is a report that tells the actual numbers with a reference to the appendix. The appendix is where you show the
actual work. This makes the paper neater and you don’t have to write in formulas into the paper.
Example: The following are just statements in a paper. ( … means the statements are not
connected, other information is needed between statements)
…The standard down payment for the house is $19,800 (appendix A.11).
… The closing cost is $1,880 (described earlier).
… The amount needed at the time of closing is $21,680 (appendix A.12) which is
the sum of these two items.
… Bank “You Name it” current saving interest rate is 2% (appendix B.2). … The
monthly amount that must be put into this sinking fund is $314.05 per month.
(appendix A.13)
Here is an example of an appendix. The actual calculations do not have to be typed but they
must be neat and well organized.

Appendix A (you must give a brief description along with the equations)

A.11 Down payment = 99,000 *.2 = $19,800 The price of the house times 20% (standard
percentage for down payment)
A.12 The money needed at the time of closing $19,800 + $1,880 = $21,680

A.13 Monthly savings for 5 years (60 months) in order to have the amount needed for the
down payment. The interest rate is 2%. Using the sinking fun for the beginning of the
month payments:

Appendix B

B.2 This is the information about the Bank and the saving interest rate. On your
documentation and printouts, highlight the information you used.