Home Buying Case Study: Michelle

1. Home Buying Case Study: Michelle By Sandy Hopkin, Chad Hunt and Lily Ritvaxay FIN 1050

2. Step One:Identify four possible housing choices available for the person/people in your case study, including their current living arrangement. • Michelle currently lives at home with her parents after her marriage of 3 ½ years ended in divorce. Her major goal is to get on with her life-both emotionally and financially. • Michelle’s short term goal for housing would be for her to rent her own apartment. • Long Term Goal: Michelle would like to own a condo or home of her own in 3 to 10 years.

3. Step Two:List the pros and cons of each type of housing including the total price and monthly payment of each. Pros of Renting an Apartment • No Maintenance & Repairs • Usually lower monthly payments • More mobility • No “Down Payment” • No property taxes • Less commitment • Some utilities paid • Lower Insurance • Some units are furnished Cons of Renting an Apartment • Building NO Equity-you never own it • No tax advantages • Cannot change or modify the property • Usually less privacy • Possible rules and restrictions • Rent can increase • Usually smaller • May have small or no yard

4. Prices and Monthly Payments Apartment # 1 Apartment #2 Living with Parents Rent=$150.00 Pros Low Cost Pay debts include credit card, attorney fees, car, savings ($5,000) Cons Living with parents Rent Apartment Rent=$599.00 (KSL) Pros Fits budget and short term goals Privacy –own place Cons $450.00 more

5. Step Two (Continued) Pros to Buying Home or Condo • Possible value increase • Significant tax advantages • Can change or modify • Building equity • Protection against rent increase • Usually more privacy • No rules or restrictions • “Pride of Ownership • Usually large yard & more parking Cons to Buying Home or Condo • Down payment & closing costs • Usually higher monthly payments • Higher taxes and insurance • All maintenance & repairs are your responsibility • Less mobility • Equity is tied up • More commitment

6. Prices and Monthly Payments Condo #1 Condo #2 Condo 1 Bedroom 1 Bath Cost: $168,300.00 ($134,640.00) Cost= 20% down payment ($33,660.00) Monthly (30 yrs @ 4% I)=$803.50 Duplex 2 Bedroom 1 Bath Cost: $165,000.00 ($132,000.00) Cost= 20% down payment ($33,000.00) Monthly (30 yrs@ 4% I)=$ 787.75

7. Prices and Monthly Payments Home #1 Home #2 Single Family Dwelling Rent=$689.00 (KSL) 2 Bedrooms 1 Bath 647 N. Concord Street Salt Lake City, Utah House with Basement Apartment to Rent $160,000.00 (TVM) Monthly PMT=$834.64 3 Bedrooms 2 Baths Salt Lake City, Utah

8. Step 3:Pick one of the houses and walk through the step of buying a home for this family. • Apartment #1: Living with parents. NeedWant Paying off debts Privacy Something short term Have her own place Become more financially stable Dream of owning a house Save money Support from family after divorce • It wouldn’t be ideal for her to buy a house at this point with her current situation. If she did buy a house Condo #2 would be the best option. It would cost her a down payment of $33,000.00 . It would take her about 3 years to save up with what she already has in savings plus with 906.33 she has left over each month we can give her $200.00 to spend. She should get a 30 year mortgage because it gives her more time to pay it off. • $787.75 per month for the next 30 years to pay off.

9. Graph: Purchase of a $165,000 house borrowing $132,000 with a 20% down payment at a rate of 4% with 4 points. Down payment $33,000.00 Points 5,280 Loan origination fee $1,320.00 Loan application fee $200.00 Appraisal fee $200.00 Title search fee $200.00 Attorneys fees $400.00 Title insurance $500.00 Recording fee $30.00 Credit report $50.00 Termite and radon inspection fee $150.00 Notary fee $50.00 Total initial cost $41,380.00

10. Step 3.3 Paying it off • How long will it take to pay the home off? If she borrows $132,000 at 4%, with payments of $787.75/month and chooses a 30 year mortgage. It will take her approximately just that, 30 years. • What is the total amount she will pay in interest? If she pays 4% on the life of her loan, she should be paying around $151,590 in interest all together. • How much of this income will go to mortgage? $366.67 will go to her mortgage/month and the other $421.08/month will be going to interest.

11. Graph: Monthly payments that go toward interest/principle on a 30 year fixed mortgage of 132000 with a rate of 4%. Total monthly payment: $787.75 • Years- Interest- $25,264.8 Principle $22,000.2 • Years- Interest- $50,529.6 Principle- $44,000.4 • Years- Interest- $75,794.4 Principle- $66,000.6 • Years- Interest- $101,059.2 Principle- $88,000.8 • Years- Interest- $126,324 Principle- $110,001 • Years- Interest- $151588.8 Principle- $132,001.2

12. Step 4:What is the best immediate housing choice for this family? How long are they likely to live at that location? What should their next move be? • The wisest choice for this particular situation would be for Michelle to continue living at home renting from her parents. • She is likely to live there for at least one year. By doing this she can reach her short term goals of: • Paying off her credit cards • Reaching $10,000 in savings • Being able to afford her own apartment • Her next move should be to work on her long term goals consisting of: • Continuing her education, so she can advance in her career • Saving for a car that she wants • Saving a down payment for a home • Saving for retirement