With a raise from his investment firm, Seyed Abdallah, 31, is inspired to look for a new home. Buying a home will allow Seyed, who is single and in the 25 percent marginal tax bracket, to itemize his taxes. He has come to you for help. Financially he is fairly secure, but he is also very risk-averse. His salary is $64,000 a year, but he does not know how much he should spend on housing. His current housing expenditures include rent of $810per month and renter's insurance premiums totaling$170 per year. His monthly bills include a $500 per month lease payment for his 2018 Acura TL and a $160 per month student loan payment. He also paid a security deposit of 2 months' rent from which he could be earning 8 percent after taxes.

Seyed has researched the recurring costs of homeownership. He has found that the real estate tax is $0.91 per $100 of assessed value and homeowner's insurance policies cost approximately $275 per year. He is unsure of the maintenance costs but estimates them at $400 per year.

He likes the idea of owning a home because as real estate values increase, the value of his home will increase. Local property values have been increasing at 5 percent per year over the last 7 years, and real estate sales commissions equal 6 percent of the purchase price. One of his concerns about buying a home is the immediate cost of the down payment and closing costs. These closing costs, he has found, includes an origination fee, $2,780 in discount points on the mortgage, and various other fees due at closing. He knows that he would pay a 20 percent down payment upfront to qualify for financing. Another concern is the lost investment income on this money, which is currently earning an after-tax return of 8 percent.

Required

a. Write a short description of the four types of housing generally available for Seyed.

b. List several sources of information applicable to any real estate purchase that might be helpful to Seyed in making a decision. Should he consider prequalifying?

c. Use the lending guidelines to determine the maximum dollar amount that he could spend per month on his home payment (PITI).

d. Calculate Seyed's monthly PITI payment. To calculate principal and interest (PI), assume he has purchased a home for $139,000 and has a $111,200, 30-year, 4.756 percent fixed-rate mortgage. To calculate his local real estate taxes (T), use the real estate rate as given in the case, assuming the property has an assessed value of $126,000. Also, include Seyed's projected homeowner's insurance (I) cost as given in the case.

e. Determine if Seyed should buy or continue renting. To purchase the house considered in part (d), Seyed would pay$6,000 in closing costs including $2,780 in discount points. Consider a 1- and 7-year time horizon.

f. Seyed is now considering a house that is selling for$180,000. Estimate the dollar amount Seyed should be prepared to pay on the day of closing. Assume an interest rate of 5.135 percent, closing costs of 6 percent of the sales price, and a 20 percent down payment.

g. Assuming the house in part (f) is appraised for $180,000 and the information in the case concerning the taxes and insurance holds true, can Seyed afford the home if he finances it for 15 years? 20 years? 30 years? Why or why not? Use Worksheet 11 to guide your answer. (Hint: Remember the qualification amount will be the lowest of the three values on the worksheet - not the highest.)

h. Will Seyed need private mortgage insurance? Will he need a gift letter?

i. Given his risk tolerance, what type of mortgage would you recommend to Seyed? Should he consider an interest-only mortgage?

Answer rating: 100% (QA)

a There are four types of housing generally available for Seyed singlefamily homes townhouses condominiums and apartments Singlefamily homes are detached homes that are not attached to any other homes ... View the full answer