Math 1030 Group Project: Finance ‘To own or not to own, that is the question. (You must complete this project with at least 1 other person) Introduction: In our in-class activity, we learned that compound interest over a long period of time can have a large impact on paying off a loan. Many students reach the conclusion that they do not want to own a home. But there is another side to home ownership besides the cost of the mortgage. In this project, you will compare the long-term results of purchasing a home or renting. According to an article by Michael Bluejay in Business Week, the long term real estate appreciation rate in the U.S. is 3.4%. While appreciation rates vary from place to place, we will use 3.4% appreciation throughout this project. Betty the Buyer vs. Randy the Renter Betty and Randy are the same age and both went to college, graduating with bachelor’s degrees and getting jobs with similar pay. The difference lies in the fact that Betty made the choice to buy a home, while Randy decided he would rent. Beginning at age 25, when Betty purchased her first home, let’s compare their finances. Betty and Randy at age 25, Betty buys a starter home for $160,000. She makes a 10% down payment (borrowing the remaining 90%) and gets a 30-year mortgage. Her interest rate is 4.875%. 1, Calculate Betty's monthly house payment, showing your work. Be sure you take the down payment into account in your loan amount. dl-(Ut EY) = dire y"*) ——5 160000 ose) (44000=e({l-(1+ 204825)40 ge) ey —__585= ll (ee - fo tH.000 aaa” (aaa )) Howe. cst $1eaa99 Fe oone7s 62.0670. lean oF siqum no . 10. ert 416000 2 %12.06 Morethly paiylheit 476 2.06. | —F —————2. Assuming she made 12 mortgage payments and including her down payment, what did Betty pay for housing this year? IZ «762,06 = 44.72 3444.72 $16 nee F 25 144.72 3. Assuming Betty continues to make the payment above, how much will s YAS? 12. 6 G2 06 = U4Y.1Z X52 4S1E F160 a Randy rents a house that has the same market value as Betty’s. His landlord has already paid off the house and charges Randy 75% of the amount that Betty is paying each month on her mortgage. Randy must also put down a security deposit of $1000 before moving in. 4, What will be Randy’s monthly rent payment? 0.75 * 162k S571. 45 [7155] 5, Assuming Randy made 12 rent payments and including the security deposit, what did he pay for housing this year? (S71. 55x12) + 10002 7896.94 97558. F4 6. How much will he pay over 5 years? 7 : . (En S5yi2 ola: syoqs [855299 inhaling dopasd we 1000, §— [PHL IF either inde i 35215 7. How much more has Betty spent on housing during the 5 years? 61723.6- 35293 264.6 (16430.Betty and Randy at age 30 Betty and Randy have both married and each have a couple of kids. They need more space! Betty plans to sell her house, but remember she still has that mortgage and it must be paid off. To figure out how much the payoff is consider the loan from the banks point of view. ‘They could have invested the principal and earned interest on it. So after 5 years with interested compounded monthly the bank would have earned: srlesl ie 0.04875) (5%12) A [UH o00 (1+ 204875)" Pe 143656.%8 ([pcte2466.3 | And Betty has been making monthly payments for 5 years so she has paid _ ee) Ge Re fee Totoble onsale.) (2 OUB7F faz 51654. 76 TCE So her unpaid balance would be the difference of these two values: y* * 5 umpaid balance = alist) alee? -) Fost Ft Ue =144000( + 2+ ou ey oft) ? 2.06 (i+ 2 1) Cae \e 8. What is Betty's unpaid balance 183,656.93 - $1, 94.76 = (51,94. 197.57 WA,997.179. Betty will pay off the mortgage on her first home with the money she gets from the sale. Recalll that she paid $160,000 for it 5 years ago. Using the national average home value increase of 3.4% per year (this is an exponential growth model!), what is the new value of Betty’s home? Show your work. Ke B=160,000(-034)*= [64,013.96 (14,113.56 10. How much money does Betty have after she sells her house and pays off the mortgage? (G4, [I.56- 131,997. [7 BZ IN6. 24 When Randy moves out of his rental house, the landlord keeps his security deposit (they always do...). How much money does Randy take away from this rental? None! 11. Given Betty's earnings from the sale of the house, compare the amounts spent by she and Randy over the last 5 years by looking at the difference between their total expenditures and total gains. Be sure to include Betty's down payment and Randy's security deposit. 5711639 Betty: gains - expenditures =#—4 £67.2| - 61,723.60 4607 .2! at BSXIZ < Bz 34293 Randy: gains - expenditures =4: 243.00 gn + 1000 BeiMoving on up! Betty buys a larger house for $250000. She again has a 30 year loan at 4.875% interest. The money she earned from the sale of her first home will be used as her down payment. 12. Calculate Betty’s monthly house payment, showing your work. Be sure you take the down payment into account in your loan amount. 250, 000- 57,116. A= 197, BS.6] BEG MT = 2285261 (0487) Fat on FT 72)) 1z fnt= 1970% \ lnT1020-%6 13. Assuming she made 12 mortgage payments, what did Betty pay for housing this year? Do not count the down payment this time because it was the earnings from selling her old house. 10 20.%6 = \2=412, 244 12 $(Z, 249. |Z 14, Assuming Betty lives in this house for the next 30 years and continues making the same house payment each month, what will she spend on housing over the next 30 years? l0z.76«\2 « 30= 367473. 15. Randy rents a house that has the same market value as Betty's, and again the landlord charges Randy 75% of the amount that Betty is paying each month on her mortgage. 1020.76 * 0.75= 765.57 5 5 65.57,Since this is a bigger house, Randy's security deposit is now $2500. What will be Randy’s monthly rent payment? 020 x@.75= 15.67 ) IW5.5z) ‘Assuming he made 12 rent payments and including the security deposit, what did Randy pay forhousingthisyear? 7p6 po ay 46.94 +2500.06 51(6g6.84/ 1686.84 Assuming Randy lives in this house for the next 30 years and continues making the same rent payment each month, what will he spend on housing over the next 30 years? G 186.4 «302 275,605.20 1 a L ST 18. & How puugh more did Betty spend over the 30 years? 7 43-2781 99.20 = 1,866.40 V s Betty spent more, but she now owns her home. Recall that she paid $250,000 for it 30 years ago. Using the national average home value increase of 3.4% per year (this is an exponential growth modell), find the new value of Betty's home. Show your work. 250,000 (1.034) foo = 66), 141.73 ‘The value of Randy's apartment is his landlords asset, not Randy's! To Randy the value of his rented house is $0.Betty and Randy at age 60 Suppose Betty and Randy continue to live where they have been living. Betty's house is paid off. Randy's landlord decided to raise rent by 10%. What is Randy's new rent payment? U5.57406,6624942.13 20. Supposing neither of them moves and their housing costs remain the same, what will each of them pay for housing over the next 20 years between the ages of 60 and 80? Betty: $ 0. 0 "en G47 13x Iz = |6,l0b.56% 20= d202,IIl.2o 21. Consider the full 50 years that have passed since Betty and Randy moved into larger homes. Who spent more on housing? Betty or Randy? Be sure to take into account the first 30 years when Betty had a mortgage as well as the 20 years after that. sees: ppaammmmings 694 247. 20 Raney: § 279105. 20+ Zoz iN. Ze S4BOAb.4O Betty and Randy at age 80 Betty and Randy are getting old now and it's time to move into an assisted living facility. 22, Recall that Betty paid $250,000 for her house 50 years ago. Using the national average home value increase of 3.4% per year, find the new value of Betty’s home. Show your work. 0,2 250,00 (140.034) 41, 3%, 35316 faz (oe)? Does it look like Betty will have financial security in her golden years? Yes23. Randy leaves his rented house to move into the assisted living facility. His landlord keeps the security deposit (they always do!). What is value of the rented house as far as Randy is concerned? no We In the long term, who came out financially ahead? Betty or Randy? Notice that throughout the project, Betty's costs are artificially low due to not taking property taxes, mortgage insurance, and home maintenance costs into account. To balance this, the project also keeps Randy's costs artificially low with low rent costs and only one rent increase. Finance Project Reflection Write a paper reflecting on what you have learned from this project. You may include any thoughts on the entire learning process from the finance module, including the in class activity, the finance homework, and especially the project. What conclusions have you drawn about the wisdom of purchasing a house? Can you make the argument that knowledge of financial formulas can help a person make life impacting decisions? Your reflection will be word-processed and be approximately one to two pages, double spaced (350 to 450 words). Use correct grammar and spelling. Your observations will be insightful and your writing will be at the college level. There are writing centers on campus that will help you analyze and improve your writing, For details go to http://www.slec.edu/swe/