For most people, buying a house is the biggest single investment decision they w
ID: 2806025 • Letter: F
Question
For most people, buying a house is the biggest single investment decision they will make. The years of saving and the decades of paying off a mortgage consume a large portion of most people’s lives. Some say home ownership is an integral part of achieving the American Dream.
The following are the basic assumptions to get started with our own simple model:
Purchase price
$150,000
Down payment
$30,000
Mortgage interest rate (annual)
6%
Principal amortization (years)
30
Annual maintenance
$1,200
Annual insurance
$1,500
Appreciation of house (annual)
2%
What is the monthly payment?
1.
$777
2.
$624
3.
$719
4.
$696
0.5 points
QUESTION 2
How much total cash will it take you to pay off the mortgage over 30 years?
1.
$368,526
2.
$259,006
3.
$235,115
4.
$273,181
0.5 points
QUESTION 3
How much will you pay in maintenance over 30 years?
1.
$45,000
2.
$22,500
3.
$36,000
4.
$18,000
0.5 points
QUESTION 4
How much will you pay in insurance over the 30 years?0
$45,000
$36,000
$18,000
$22,500
0.5 points
QUESTION 5
Your alternative is renting a house. Assume you find there is a similar house nearby for rent. Assume that it has all the same municipal services, the same school system, the same transportation, the same cost of utilities, etc. These are important factors in real life but we will ignore them for this exercise.
Cost of renting similar home (monthly)
$1,200
Assumed return on savings & investing (annual)
6%
How much will you pay in rent in total over the 30 years?
1.
$180,000
2.
$216,000
3.
$432,000
4.
$454,000
0.5 points
QUESTION 6
Assume you put the down payment into an investment account and do not add to it or take any funds out. What is the future value of this lump sum over 30 years @ 6%?
1.
$273,181
2.
$441,917
3.
$269,811
4.
$180,677
0.5 points
QUESTION 7
Assume you have stock broker handing this investment for you and he is able to generate net returns of 9% annually over the 30 years. What is the future value of this lump sum investment?
1.
$441,917
2.
$358,526
3.
$269,811
4.
$180,677
0.5 points
QUESTION 8
Assume you can earn 3% appreciation on your house. What is your house worth in 30 years?
1.
$368,526
2.
$235,115
3.
$273,181
4.
$441,917
0.5 points
QUESTION 9
Assume you can earn 12% on your investment fund with the stock broker. What is your investment of your down payment worth in 30 years?
1.
$269,811
2.
$441,917
3.
$180,877
4.
$1,078,489
0.5 points
QUESTION 10
Keeping all things the same from Question 9, your banker tells you that if you increase your down payment to 30% that you can get an interest rate of 4% with a 15-year mortgage. What would your monthly payment be?
1.
$719
2.
$696
3.
$823
4.
$777
Purchase price
$150,000
Down payment
$30,000
Mortgage interest rate (annual)
6%
Principal amortization (years)
30
Annual maintenance
$1,200
Annual insurance
$1,500
Appreciation of house (annual)
2%
Explanation / Answer
1. Option is 3 answer is 719
2. Multiplying 719*30*12, we get 259006, option 2
3. Annual mainatainance is given as 1200 so in 30 years you will pay a total of 1200*30=36000
That is option 3
4. Annual insurance charges are 1500 so in 30 years you will have to pay 1500*30=45000
That is option 1
5. Rent for 1 month=1200, so for 30 years it is equal to 1200*30*12=432000
That is option 3
6. We use the formula FV=PV(1+r/m)mt
where PV=30000,r=6%,m=12(monthly compounding), t=30 years
FV comes out to be 180677.26
That is option 4
7. We use the formula FV=PV(1+r/m)mt
where PV=30000,r=9%,m=12(monthly compounding), t=30 years
FV comes out to be 441917.28
That is option 1
8. We use the formula FV=PV(1+r/m)mt
where PV=150000,r=3%,m=12(monthly compounding), t=30 years
FV comes out to be 368526.33
That is option 1
9. We use the formula FV=PV(1+r/m)mt
where PV=30000,r=12%,m=12(monthly compounding), t=30 years
FV comes out to be 1078489.24
That is option 4
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