Reference no: EM133037666
Question - Fundamentals of Financial Planning Case Study: Lam & Cara Nguyen - This case study is to develop your ability to analyze, calculate credit cost, and choose the best credit options.
Objectives: After completing this case study activity, you will be able to:
Calculate if the client will have enough fund for down payment.
Calculate the monthly mortgage payment and amortization period.
Analyze if the client is qualified for a home equity line of credit.
Choose the better option between mortgage and home equity line of credit.
Introduction - Lam and Cara, work for the Town of Bracebridge, with an annual gross salary of $40,000 each. The expected annual salary increase is 2.5%. Below is a list of their assets and liabilities.
Assets: Cash (annual rate of return 0.25%) $6,000
GICS (annual rate of return 1.5%) 5,000
CSBS (annual rate of return 2.75%) 7,000
Automobiles 32,000
House (current) 230,000
Liabilities: Credit cards (18% annual rate, 3% minimum payment on balance) $10,000
Car loans ($500 per month, three years left) 15,000
Current property taxes (per year) outstanding bill 2,400
Mortgage (contracted 2 years ago) 165,000
Amortization period, 25 years
Three years left on the 7% five year mortgage term
Lam and Cara want to purchase a new house costing $320,000. They qualify for a 3-year fixed term mortgage at 5.75% with a 20-year amortization period. Property taxes on the new house is $3,600 per year.
The market price for their current house is $247,900, with legal fees, real estate and land transfer fees totaling $7,500. They hope the net proceeds from the sale of the current house, will give them at least $80,000, which would be used as a down payment for the new house.
If the net proceed is less than $80,000, they will use their cash savings to ensure that the down payment is $80,000.
Case study instructions and questions:
1. Will Lam and Cara have the $80,000 down payment needed from the sale of the current residence?
2. What is the monthly mortgage payment on the new house, assuming they have the $80,000 down payment? Will they qualify for the new mortgage loan? (Hint: include GDS and TDS calculation)
3. Suppose Lam and Cara have a provision in their new mortgage agreement, that allows a mortgage renewal in three years at current rate, and then at five years, by making a payment of $20,000 three years from today and $25,000 eight years from today. If the monthly payment remains the same, how long will it take them to pay off the new mortgage?
4. Lam and Cara is considering another alternative. Instead of buying a new house, they should get a home equity line of credit for $55,000, which has 4% interest and a minimum monthly payment that is twice the interest payment. The $55,000 will be use to purchase a condominium that will have a conventional mortgage. Would they be qualified for the home equity line of credit? What would be the maximum purchase price for the condominium (ignore legal and real estate fees)?