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Math 1030 Group Project: Finance

To own or not to own, that is the question.


(You must complete this project with at least 1 other person)

Introduction:
In our in-class activity, we learned that compound interest over a long period of time can
have a large impact on paying off a loan. Many students reach the conclusion that they do
not want to own a home. But there is another side to home ownership besides the cost of
the mortgage. In this project, you will compare the long-term results of purchasing a home
or renting.

According to an article by Michael Bluejay in Business Week, the long term real estate
appreciation rate in the U.S. is 3.4%. While appreciation rates vary from place to place, we
will use 3.4% appreciation throughout this project.

Betty the Buyer vs. Randy the Renter


Betty and Randy are the same age and both went to college, graduating with bachelor’s
degrees and getting jobs with similar pay. The difference lies in the fact that Betty made
the choice to buy a home, while Randy decided he would rent. Beginning at age 25, when
Betty purchased her first home, let’s compare their finances.

Betty and Randy at age 25


Betty buys a starter home for $160,000. She makes a 10% down payment (borrowing the
remaining 90%) and gets a 30-year mortgage. Her interest rate is 4.875%.
Calculate Betty’s monthly house payment to the nearest dollar, showing your work. Be
sure you take the down payment into account in your loan amount.
House Price 160,000
10% Down 16,000
Loan Amount 144,000
Go to the Amortization Schedule and enter the data. Loan Amount 144000; Annual interest
rate 4.875; Loan period in years 30; Number of Payments per year 12; use an artificial start
date of loan like 1/1/2018. Up will come the 30 year schedule. The total payment column
shows the monthly house payment of $762.06. Round to the nearest dollar:
Betty’s monthly house payment: ____$762.00_______________________________
Assuming she made 12 mortgage payments and including her down payment, what did
Betty pay for housing this year?
12 x 762 $9,144
Down payment $16,000
$25,144

Assuming Betty continues to make the payment above, how much will she pay over 5
years?
5 x 9,144 $45,720
Down payment $16,000
$61,720

Randy rents a house that has the same market value as Betty’s. His landlord has already
paid off the house and charges Randy 75% of the amount that Betty is paying each month
on her mortgage. Randy must also put down a security deposit of $1000 before moving in.
75% x 762 $571.50 rounded

Calculate Randy’s monthly rent payment to the nearest dollar: _______$572.00_______________

Assuming Randy made 12 rent payments and including the security deposit, what did he
pay for housing this year?
12 x 572 $6,864.00
Security deposit $1,000.00
$7,864.00
How much will he pay over 5 years?
5 x 6,864 $34,320.00
Security deposit $ 1,000.00
$35,320.00

How much more has Betty spent on housing during the 5 years?
Betty $61,720
Randy $35,320
$26,400

Betty and Randy at age 30


Betty and Randy have both married and each have a couple of kids. They need more space!
Betty sells her house, but remember she still has that mortgage and it must be paid off.
Calculate her pay off balance on the house to the nearest dollar. Show your work. See your
textbook for an example of finding the remaining balance on a loan.
Look at the Amortization Schedule on line 60, the end of 5 years.
Under the column Ending Balance it shows: $131,997.18

Betty will pay off the mortgage on her first home with the money she gets from the sale.
Recall that she paid $160,000 for it 5 years ago. Using the national average home value
increase of 3.4% per year (this is an exponential growth model!), find the new value of
Betty’s home to the nearest dollar. Show your work.
Future Value = Present Value x (1 + interest rate in decimals)raised to the nth power.
In this case n = 5; the interest rate is .034 Therefore 1.034 to the 5th power times
the $160,000 initial value of the house.

$189,113.56 rounded to $189,114.

How much money does Betty have after she sells her house and pays off the mortgage?
Sales Value $189,114
Payoff Balance $131,997
Betty’s Gain $ 57,117

When Randy moves out of his rental house, the landlord keeps his security deposit (they
always do…). How much money does Randy take away from this rental? None!
Given Betty’s earnings from the sale of the house, compare the amounts spent by she and
Randy over the last 5 years by looking at the difference between their total expenditures
and total gains. Be sure to include Betty’s down payment and Randy’s security deposit.
Betty: gains – expenditures = Gain $57,117
Exp. $61,720
Net - $ 4,603
Randy: gains – expenditures = Gain 0
Exp. $35,320
Net - $35,320

Moving on up!
Betty buys a larger house for $250000. She again has a 30 year loan at 4.875% interest.
The money she earned from the sale of her first home will be used as her down payment.
Calculate Betty’s monthly house payment to the nearest dollar, showing your work. Be
sure you take the down payment into account in your loan amount.
House $250,000
Down Payment $ 57,116
Loan $192,884
Now put this new loan into the Amortization Schedule and look at the Total Payment
column: $1,020.76 rounded to the nearest dollar

Betty’s monthly house payment: ______$1,021_____________________________


Assuming she made 12 mortgage payments, what did Betty pay for housing this year? Do
not count the down payment this time because it was the earnings from selling her old
house.
12 x 1021 $12,252

Assuming Betty lives in this house for the next 30 years and continues making the same
house payment each month, what will she spend on housing over the next 30 years?
30 x 12,252 $367,560
Randy rents a house that has the same market value as Betty’s, and again the landlord
charges Randy 75% of the amount that Betty is paying each month on her mortgage. Since
this is a bigger house, Randy’s security deposit is now $2500.
75% x 1021 $765.75

Calculate Randy’s monthly rent payment to the nearest dollar: ________$766.00_____________


Assuming he made 12 rent payments and including the security deposit, what did Randy
pay for housing this year?
12 x 766 $9,192
Security Deposit $2,500
$11,692
Assuming Randy lives in this house for the next 30 years and continues making the same
rent payment each month, what will he spend on housing over the next 30 years?
30 x 9192 $275,760
Security Deposit 2,500
$278,260
How much more did Betty spend over the 30 years?
Betty $367,560
Randy $278,260
$ 89,300

Betty spent more, but she now owns her home. Recall that she paid $250,000 for it 30
years ago. Using the national average home value increase of 3.4% per year (this is an
exponential growth model!), find the new value of Betty’s home to the nearest dollar. Show
your work.
Again, using the formula for Future Value:
Future Value = 250,000 x (1 + .034) raised to the 30th power.
$681,641.73 rounded to
$681,642.00

The value of Randy’s apartment is his landlord’s asset, not Randy’s! To Randy the value of
his rented house is $0.

Betty and Randy at age 60


Suppose Betty and Randy continue to live where they have been living. Betty’s house is
paid off. Randy’s landlord decided to raise rent by 10%.
What is Randy’s new rent payment? 766 x 110% = $842.60 or $843.00
Supposing neither of them moves and their housing costs remain the same, what will each
of them pay for housing over the next 20 years between the ages of 60 and 80?
Betty: $0

Randy: 20 years x 12 months/yr. x $843/mo. = $202,320

Consider the full 50 years that have passed since Betty and Randy moved into larger
homes. Who spent more on housing? Betty or Randy? Be sure to take into account the
first 30 years when Betty had a mortgage as well as the 20 years after that.
Betty: $367,560

Randy: 278,260 + 202,320 = $480,580

Betty and Randy at age 80


Betty and Randy are getting old now and it’s time to move into an assisted living facility.
Recall that Betty paid $250,000 for her house 50 years ago. Using the national average
home value increase of 3.4% per year, find the new value of Betty’s home to the nearest
dollar. Show your work.
Again, using the formula for Future Value:
Future Value = 681,642 x (1 + .034) raised to the 20th power.
$1,330,353.69 rounded to

$1,330,354

or: Future Value = 250,000 x (1 + .034) raised to the 50th power.


$1,330,353.16 rounded to $1,330,353
Does it look like Betty will have financial security in her golden years?
She has about 14 years at an average of $8,000 per month in an assisted living
facility – better than the cheapest, but not luxurious.

Randy leaves his rented house to move into the assisted living facility. His landlord keeps
the security deposit (they always do!). What is value of the rent house as far as Randy is
concerned?
Of no value!

In the long term, who came out financially ahead? Betty or Randy?

Betty

Notice that throughout the project, Betty’s costs are artificially low due to not taking
property taxes, mortgage insurance, and home maintenance costs into account. To balance
this, the project also keeps Randy’s costs artificially low with low rent costs and only one
rent increase.
Finance Project Reflection

Write a paper reflecting on what you have learned from this project. You may include
any thoughts on the entire learning process from the finance module, including the in-
class activity, the finance homework, and especially the project. What conclusions
have you drawn about the wisdom of purchasing a house? Can you make the
argument that knowledge of financial formulas can help a person make life impacting
decisions?

Your reflection will be word-processed and be approximately one to two pages,


double spaced (350 to 450 words). Use correct grammar and spelling. Your
observations will be insightful and your writing will be at the college level.

There are writing centers on campus that will help you analyze and improve your
writing. For details go to http://www.slcc.edu/swc/

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