A client has come to you for advice on, given a specific set of circumstances, w
ID: 2568739 • Letter: A
Question
A client has come to you for advice on, given a specific set of circumstances, whether a specific purchase works (financially) for them. Following is the information they provide to you Married couple,late 20's, 2 preschool children. Gross annual salary of $62,000 Currently renting but have found a new condominium development where they carn purchase a unit for $215,000.00. The yearly insurance would be $800.00, yearly taxes would be $2,500.00 and utilities are estimated at $1440.00 for a year (about $500.00 higher than in the rental). Because of their short credit history and only average credit score they have been pre-qualified for a fixed rate. 30 year loan @ 6%. The lender charges 2 points on mortgages where at least 20% down payment is made but 3 points if less than 20%. No loan is offered if less than 10% down payment is made. Closing costs are estimated at 5% of the homes purchase price. The bank is willing to lend if the monthly principal+ interest payments are less than or equal to 28% of the monthly gross income OR if the monthly PITI to monthly gross income is less than or equal to 35%. They have $44,000.00 in CD's that have been saved specifically for buying a home. They also have $20,000 in their emergency fund. What are three advantages and three disadvantages you would discuss with the couple about buying a condominium compared to continued renting of a similar size apartment? If the lender decided that they put down 20% could the couple afford to buy? Support your answer with numbers!! If they want to only put $25,000.00 down calculate their closing costs. Determine, using a mortgage calculator, their monthly principal +interest ll- ments. Would they qualify for the loan based on one or both ratios? Support your answer with numbers!!! IV. What recommendations would you make regarding lowering their monthly payments? If they asked about an adjustable mort first year rate of 596 that could go up a maximum of 2% a yearwith of 1296 what would you tell them? What other (financial) information would you like to know about this family that would help you in answering the questions raised?Explanation / Answer
Answer to 1.
Three Advantages of buying Condominium instead of renting:
(a) Couple would save on yearly renting cost.
(b) Couple would have reduced tax liability in the form of claiming Itemized deductions of Interest, Insurance and other property taxes paid etc., in their IRS Tax Returns.
(c) Couple could gain on increase in the Property Value in the long run.
Three disadvantages of buying Condominium instead of renting:
(a) It will have negative impact on their monthly cash flows due to monthly repayment of Principal and Interest amount.
(b) Cost of repairs and maintenance would be additional burden on the finances of couple.
(c) In the event of default in the repayments, couple could lose the condominium.
Answer to 2.
If lender decides that Couple to put down the 20%, Couple would be able to afford the buying. As the cost of a unit of condominium is $ 215,000, therefore 20% of $ 215,000 equals to $ 43,000. Plus closing cost of 5% equals to $ 10,750. Plus additional closing points of 2% equals to $ 4,300. Total cost of down payment comes out to be $ 58050 ($ 43,000+$ 10, 750+ $ 4,300) i.e. 27%.
Couple have $ 44,000 in CD’s and $ 20,000 in their emergency funds which equals to a total of $ 64,000. Therefore, even after paying $ 58050 upfront, Couple could save $ 5,950.
Answer to 4.
Couple could lower the monthly payments by paying maximum Down Payment in the beginning if they can afford. In that way they will have less amount outstanding to be financed as mortgage and hence less amount payable in the monthly instalments.
Adjustable Rate Mortgage can be an option to initially reduce the amount payable monthly but in the life time of loan, the rates and interest cost could increase substantially. Hence, the Couple could end up paying a lot more than they thought initially. Adjustable Rate Mortgage is totally dependent on the flexibility and mercy of lender.
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