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Homework ProblemsThe following is the homework assignment for Week Three covering Chapters 7-9. To submit your homework create a word document that contains your numbered answers to assignments. Please clearly indicate which chapter the homework is from and don’t forget to type your name on the document. You will then submit the file through the homework drop box. Please clearly mark your homework with: 1) your name, 2) chapter assignment is from (or Additional Problems), and 3) problem number.

Your homework will be graded and a grade posted in your Portfolio. Homework is due on January 31st.

HOMEWORK: Week One

Chapter 7: 7.2 #2 (p. 168)

Chapter 8: 8.2 #3 (p. 205)

Chapter 9: 9.2 #1 (p. 225) [c. only answer the adjustable rate mortgage part]

Additional Homework in Week 3 Module under Activities â€“ The following is the assignment. The above copied information have been provided to assist you in keeping track of all assigned homework.

Additional Problems:

Rico needs approximately $2,500 to buy a new computer. A two-year unsecured loan through the credit union is available for 12 percent interest. The current ratio on his revolving home equity line is 8.75 percent, although he is reluctant to use it. Rico is in the15 percent federal tax bracket and the 5.75 percent state tax bracket. Which loan should he choose? Why? Regardless of the loan chosen, Rico wants to pay off the loan in 24 months. Calculate the payments for him, assuming both loans use the simple interest calculation method.

Shirley, a recent college graduate, excitedly described to her older sister the $1,500 sofa, chair, and tables she found today. However, when asked she could not tell her sister which interest calculation method was to be used on her credit-based purchase. Calculate the monthly payments and total cost for a bank loan assuming a one-year repayment period and 14 percent interest. Now assume the store uses the add-on method of interest calculation. Calculate the monthly payment and total cost with a one-year repayment period and 12 percent interest. Explain why the bank payment and total cost are lower even though the stated interest rate is higher.

Rick wants a new wide screen flat panel TV and TXH certified home theater receiver. He figures the system will cost $4,000. The store will finance up to $3,500 for 2 years ata 19.5 percent interest rate. Assuming Rick accepts the storeâ€™s financing, by how much will he reduce his monthly payment and how much interest will he save if he increases his down payment to $1,000? Solve usingthe Monthly Installment Loan Tables â€“ they have been uploaded in the Activities section of this weekâ€™s study module.

Antonio would like to replace his golf clubs with a custom measured set. A local sporting goods megastore is advertising custom clubs for $500, including a new bag. In-store financing is available at 5 percent or he can choose not to renew his $500 certificate of deposit (CD), which just matured. The advertised CD renewal rate is 6.4 percent. Antonio knows the in-store financing costs would not affect his taxes, but he knows heâ€™ll pay taxes (25 percent federal and 5.75 percent state) on the CD interest earnings. Should he cash the CD or use the in-store financing? Why?

Noel and Herman need to replace her car. But with the furniture and appliance payments, the credit card bills, and Hermanâ€™s car payment, they are uncertain if they can afford another payment. The auto-financing representative has asked, â€œWhat size payments are you thinking of?â€ Current payments total $475 of their $3,250 combined monthly take-home pay. Calculate the debt limit ratio to help them decide about the car purchase and answer the question, â€œWhat size payments are you thinking of?â€ By first assuming a 15 percent limit and then â€œstretchingâ€ it to a 20 percent limit.

Annieâ€™s mortgage statement shows a total payment of $699.12 with $604.60 paid toward principal and interest and $94.52 paid for taxes and insurance. Taxes and insurance for three months were collected at closing. Now after six months of payments, she is curious about the total in her escrow account. Calculate the amount for her and explain the account.

Calculate how much money a prospective homeowner would need for closing costs on a house that costs $100,000. Calculate based on a 20 percent down payment, 2 discount points on the loan a, 1-point origination fee, and $1.400 in miscellaneous other fees.

WEEK Three — Example ProblemsEx-1. Susan needs approximately $1,100 to buy a new big screen TV. A 2-year unsecured loan through the credit union is available for 17.5 percent interest. The current rate on her revolving home equity is 11 percent, although she is reluctant to use it. Susan is in the 27 percent federal tax bracket and the 4.5 percent state bracket. Which loan should she choose? Why? Regardless of the loan chosen, Susan wants to pay off the loan in 24 months. Calculate the payments for her, assuming both loans use the simple interest calculation method.

Solution:

The after-tax cost of the 11 percent home equity loan would be 7.54 percent based on the following calculation, which considers the tax savings on both federal and state taxes:

7.54% = 11% [1 â€“ (0.27 0.045)]

The monthly payment for the unsecured loan is $49.68 per $1,000 borrowed versus $46.61 per $1,000 for the home equity loan, according to the Monthly Installment Loan Tables in Appendix E. The corresponding monthly payments would be:

$49.68 x 1.1 = $54.65 for the unsecured debt

$46.61 x 1.1 = $51.27 for the home equity loan

Note: 1.1 stands for $1,100

The difference in payment would result in a savings of $3.38 over the life of the loan in addition to the applicable tax savings of $41.10 [($51.27 x 24) â€“ $1,100] x 0.3150. Susan should choose the home equity loan, which is $41.10 cheaper.

Note: 0.3150 = 0.27 .045

Personally I would advise against this. Never borrow against your home equity (family emergency could be an exception) because you are borrowing against your future financial security.

Ex-2. Brian, a recent college graduate, excitedly described the $2,500 home entertainment system he had found today. In a discussion with his parents, Brian was surprised to hear that a few years earlier they had financed furniture with the add-on method of interest calculation. Calculate the monthly payments and total cost for a bank loan assuming a 1-year repayment period and 18 percent interest. Now assume the store uses the add-on method on interest calculation. Calculate the monthly payment and total cost with a 1-year repayment period and 16 percent interest. Explain why the bank payment and total cost are lower even though the stated interest rate is higher.

Solution:

Based on the Monthly Installment Loan Tables in Appendix E, Brianâ€™s monthly payment for the simple interest loan would be $229.20 ($91.68 x 2.5) for a total loan cost of $2,750.40. Using the add-on method, Brian would pay a monthly payment of $241.67. Adding the interest ($400 as calculated below) to the principal amount ($2,500) and dividing by the total number of payments ($2,900 / 12) yields a payment amount of $241.67.

Interest = principal x interest rate x time

Interest = $2,500 x 0.16 x 1 = $400

With the same loan terms, Brian will save $12.47 a month, or a total of $149.64, if she finds a loan using the simple interest method. The add-on method is more expensive because it assumes that you have the entire loan balance outstanding for the entire period; rather than a decreasing balance, as is taken into account by the simple interest loan.

Ex-3. Allen wants a new dining room set for his wife. He figures the furniture will cost $7,000. The store will finance up to $5,500 for 2 years at an 8.75 percent interest rate. Assuming Allen accepts the storeâ€™s financing, how much will he save in total interest if he increases his down payment to $2,500?

Solution:

Based on the Monthly Installment Loan Tables in Appendix E, the monthly payment to finance $5,500 would be $250.64 ($45.57 x 5.5), with a total loan cost of $6,015.36 and interest charges of $515.36. Similarly, financing $4,500 would cost $205.07 ($45.57 x 4.5), with a total loan cost of $4921.68 and interest charges of $421.68. Increasing the down payment by $1,000, results in an interest savings of $93.68.

Ex-4. Janelle would like to purchase a jet ski. A local sporting goods megastore is advertising jet skis for $3,000. In-store financing is available at 3 percent or she can choose not to renew her $3,000 certificate of deposit (CD), which just matured. The advertised CD renewal rate is 5.5 percent. Janelle knows the in-store financing costs would not affect her taxes, but she knows sheâ€™ll pay taxes (27 percent federal and 6.75 percent state) on the CD interest earnings. Should she cash the CD or use the in-store financing?

Solution:

Janelleâ€™s after-tax return from cashing in her CD would be 3.64 percent based on the following calculation, which considers both the federal and state taxes:

3.64% = 5.5% [1 â€“ (0.27 0.0675)]

Because her CD earnings rate of 3.64 percent, after taxes, is more than the in-store financing rate of 3 percent, she should not cash in this CD to purchase the jet ski.

Ex-5. Suzy and Joe need to buy a second car. However, in addition to the furniture and appliance payments, and the credit card bills, they are uncertain if they can afford another payment. The auto-financing representative has asked, â€œWhat size payments are you thinking of?â€ Current payments total $325 of their $1700 combined monthly take-home pay. Calculate the debt limit ratio to help them decide about the car purchase and answer the question, â€œWhat size payments are you thinking of?â€

Solution:

Suzy and Joe currently have a debt limit ratio of 19.12 percent, or $325/$1700. Ideally, this ratio should not exceed 15 percent to insure maximum financial flexibility. At 20 percent, no additional consumer debt should be taken on. Consequently, Suzy and Joe,have few choices. If they want to exceed the 20 percent recommendation, they can have any size car payment. But meeting that payment, and others, may be impossible. To stay within the 20 percent limit, they can afford a car payment of $15 (0.20 x $1,700) = $340 â€“ $325 = $15), which is not very realistic. Suzy and Joe would be well advised to postpone the car purchase until they have significantly reduced their debt limit ratio by paying off some of their current debt obligations.

Ex-6. Samâ€™s mortgage statement shows a total payment of $879.05 with $755.98 paid toward principal and interest and $123.07 paid for taxes and insurance. Taxes and insurance for 3 months were collected at closing. Now after 9 months of payments, he is curious about the total in his escrow account. Calculate the amount for him and explain the account.

Solution:

An escrow account is a special reserve account used to accumulate the annual property (real estate) tax payments and homeownerâ€™s insurance premiums for the homeowner. Assuming no quarterly or semi-annual tax withdrawals from the account, the account should total $1,476.84 = [(123.07 x 3) (123.07 x 9)].

Ex-7. Calculate how much money a prospective homeowner would need for closing costs on a house that costs $150,000. Calculate based on a 20% down payment, 2 discount points on the loan, a 1-point origination fee, and $1,200 in miscellaneous other fees.

Solution:

The total closing costs of $34,800 are itemized below:

Down payment (20 percent of the selling price) = $30,000

Discount points (2 percent of the $120,000 loan amount) = $2,400

Origination fee (1 percent of the $120,000 loan amount) = $1,200

Other fees = $1,200