Sample Project Buying Your First Home My Budget

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1 Sample Project Buying Your First Home My Budget 1. I used the home affordability calculator from From the career project, I project that I will earn about $55,000 a year. These are the inputs that I entered into the calculator: Gross annual income: $ 55,000 Down payment amount: $ 15,000 Monthly debt: (e.g., student loan, credit card payments, car loan) $ 750 Mortgage rate: 3.5% Years: 30 The calculator indicated that I could afford a $184,780 home and make a $762 monthly mortgage payment. See screen capture below. Finding My House 2. Using I found a house in Allen Park, MI for $127,900. This house has three bedrooms and two bathrooms. It sits on 5000 square feet and the house is 1600 square feet. This is a single family home but could be converted to a two gamily with a little work which means I could rent it out and make money. It is on large corner lot, both levels have porch enclosures off the back of the home. TWO kitchens!!! I chose this house because I like Cape Cod style homes and it is in a good school district. There is enough land for me to have a garden and some pets. The Web site estimates that my monthly mortgage payment will be $539. See screen shot below.

2 Getting a Mortgage 3. I decided to make a down payment of $15,000. This leaves me with $112,900 that I must mortgage. I compared different mortgage options using the internet. With good credit, I could qualify for the following rates: Mortgage Type Rate Monthly Payment Points where 30 year $522 1 I3 lending $ Sebonic Financial $515 1 Erates mortgage 15 year 3.16 $758 1 Bank of America $785 0 Sebonic Financial $778 0 Erates mortgage With the 15-year mortgage, I would spend approximately $136,440 ($758*180) in total monthly payments. With the 30- year mortgage, I would have to spend $187,920 ($522*360). Although I could save $51,480 ($187,920-$136,440) in the long run if I choose a 15-year mortgage, the monthly payment would be difficult for me to afford almost $300 more a month. I could use this money for my car payment therefore I am choosing a 30 year mortgage. Besides the affordability calculator indicates I cannot afford this house for a 15 year mortgage. My house is $129K and this indicates I should only buy a house $121k or less if I were to have a 15 year mortgage.

3 All of the options in the mortgage comparison table above are available to me because I am way under in my house price. I can afford a $187,800 house and I have chosen to buy a $127,900. The biggest different between the options is the interest rates and the points I have to pay up front. One point is 1 percent of the mortgaged amount. The first and last option from the above table for 30 years requires me to pay $1,129 at the closing, in addition to my closing costs and down payment. The second option offers negative points (they pay me money at the closing!). I would receive $790 at the time of the closing to offset some of my fees. Paying points affects my interest rate, which affects how much money I will pay in the long run. Conclusion: I will go with my second option from Sebonic Financial for a 30-year fixed-rate mortgage, and pay no points a $546 mortgage payment.

4 Closing Costs 4. I found a list of closing costs I would expect to pay for my mortgage at Sebonic Financial. Therefore I will to bring my down payment of $15,000 plus $369 for closing. Total Monthly Payment 5. Each month, my mortgage payment will reduce my loan balance and pay interest to my lender. I will also pay my property taxes and homeowner s insurance into an escrow account. Yearly property taxes = Assessed Value * Mill Rate. The assessment value is 50 percent of the market value of the home. The mill rate is the amount paid for every $1,000 of assessed value. Allen park s mill rate is for The assessed value of my home is 0.50 * $127,900 = $63,950. I divide this by

5 1000 and multiply by the mill rate. Property tax = 127,900 / 1000 * = $3, The monthly share paid into escrow is $ / 12 = $ for property taxes. According to the average premium paid by Michigan residents for homeowners insurance in 2015 was $1,020. Based on this, I would expect to pay $85 per month into escrow. Until I own 20 percent of the home, I will need to pay private mortgage insurance (PMI). To estimate my PMI, I used a calculator I found at They projected my PMI would cost me $45.16 per month see screen capture below. As the value of my house increases, I can have my home reassessed and hopefully cancel PMI before this time. This brings my total monthly payment to $ ($45.16 (PMI) + $85 (insurance) + $ (taxes) + $546 (principle/interest) ). Amortization Table 6. I used the spreadsheet given to us from teacher. From the table below, my first payment $422 will go to interest while only approx. $150 will go to the principle. At payment 176 (14 years later), I will finally be paying more on my principle ($286) than I pay for interest, $285. Finally my last payment, is $567 to principle and $2 to interest. No. Payment Date Year Interest Rate Interest Due Payment Due Extra Payments Additional Payment Principal Paid 1 6/1/ % /1/ % /1/ %

6 Overall, I will pay $92,794 in interest over 30 years to borrow the $112,900. I will have paid in total for my $127,900 house, a whopping approximately $300,000. I paid over 42% more because I had to borrow this money. The Financial Decision 7. Is it worth it to take on so much debt? We live in a day when so many carry so much debt, we have to consider carefully whether all the interest we must pay over time is really worth it. Although $92,000 is a huge amount of interest, taking on debt to buy a home is a very sound financial decision. The value of the home increases over time, unlike the value of a car. You can draw on the equity you ve built in your home if an emergency arises. And if you downsize later in life you can use the proceeds to help with retirement expenses. You have to pay money for a place to live whether you rent or take on a mortgage. With a house, you have more freedom to do with it what you like. Is it not better to build an investment than just hand money to a landlord? It would be nice if you could buy the house outright and not have to pay interest, but who has that kind of cash? And if you tried to save for the entire purchase price, the value of the home would increase faster than you could save.