FIN 2000: Personal Finance

Mission: So Possible — Buy a home

This exercise is about coming up with (i) a rough estimate of your monthly expense on a home you are purchasing and, through actual real estate market research given your own house hunt criteria, (ii) how your estimate looks compared to the monthly payments based on how the market values what you want.

From there, you may find that your house search criteria lead to something that is more/less than what you are willing to pay. Especially when your estimation falls short (the usual case), what changes are you willing to make in order to get that dream house (e.g., less dining out, consider a house with fewer rooms, cut back on clothing expense, etc.)?

Please provide your answers to the questions in the document. When providing your answers to 1c and 2b, please share with me your Excel code line.

Assume that you are buying a house. Answer the questions / follow the directions below:

1. How much would you be willing to pay for a house each month? This includes any maintenance expenses (e.g., plumbing, gardening/landscaping, etc., and of course your mortgage payment). PLEASE DO NOT CALCULATE ANYTHING YET, rather, just use your feeling.

a. What is the amount within this payment that you expect to allocate towards paying off your mortgage?

b. Come up with a reasonable expectation of your annual salary 5 years later. Divide this number by 12 to get your expected monthly salary. How much is your expected monthly mortgage payment as a percentage of your monthly salary? Are you within the general rule of 30%?

c. The ongoing mortgage rate for a 30YR fixed installment is about 3.168% APR. We’ll use this rate. Note also that mortgage payments are made every month (i.e., 12 times a year).

Given your answer in part a, what is the amount you can borrow under these loan terms? HINT: Solve for PV using your mortgage payments.

d. In your Week 1 Assignment on goals, was one of your goals to save up a certain amount of cash? If so, let’s use that as the down payment for a new house. If you did not list savings as a goal, try to come up with a number today.

e. The sum of the amount you can borrow (part c) and the down payment (part d) is the house price you can afford. What is this number?

2. Search for your dream house on Redfin/Zillow/Trulia.

a. Before searching, write down a few things you are particularly looking for. E.g., which town(s), how many bedrooms/bathrooms, how many-car garage, comes with a pool, square footage, etc.

b. How much does your dream house cost? Compare this to your answer in 1.e. Using the same 30YR fixed installment at the interest stated in 1c above, what is your monthly payment if you go with the dream house?

c. Are you willing to adjust (especially when your dream house in 2b is more expensive than your expected borrowing amount in 1e)?