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 i~J_.875%.

l. Calculate Betty's monthly house payment. showing your work. Be sure you take the
down payment into account in your loan amount. , l 4'6lS ) - 1,0 l \ L)
po -= e\ e l- l \ \- { ) - tJ \( ) 1'1 l.{ o00 (\ ( 1 - l 1 1- 1L -:: 1s·q . '1 (g

(i)

2. Assuming she made 12 mortgage payments and including her down payment, what did
Betty pay for housing this year?¡ ¡p OGO , q
14 4 _1 1 • l 14 4 . l l J.
1vl_ . 0{o X \ 2. . .--\C\i4l\ ·1 1. [ -
\lot),{) C() (_. lO)

l
3. Assuming Betty continues to make the payment above, how much will she pay over S
years?
•
91
YLl ·l1 l'l) e %1-V,.t, 1- llo OOO J•v~, 1-;:;;·_c,17

Randy rents a house that has the same market value as Betty's. His landlord has a\ready
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.

4. What will be Randy's monthly rent payment? 7 u, l. . O t. X •15 l'l,S 1 \~ s,· J

S. Assuming Randy made 12 rent payments and including the security deposit, what did
he pay for housing this year? 7 1 'i •S ( l1.) • (p 1/ s i . l. • 100 0

2
 6 · How much will he pay over 5 years?

\ fi ~S,19?; =7

1 7 l 7; , (_p •. -~ t;
1 1 =-E ~
7. How much more has Betty spent on housing during the 5 years?
'2- 9 :?,

Betty and Randy at ~e 30

Betty and Randy have both married and each have a couple of kids. They need more space!

Betty plans to sell her house, but remember she still has that mortgage and it must be paid
off. To figure out how much the payoff is consider the loan from the banks point ofview.
They could have invested the principal and earned interest on it. So after 5 years with
interested compounded monthly the bank would have earned:

. lS )"l''J.\
ri..t'--L oOCi l\+ , '2. a:: L!5~-'~-"Jw.1t

And Betty has been making monthly payments for 5 years so she has paid

Pe; :: 11.Y'l. .o~ l ( 1+ · _.,_5>_...,s )e, (

0 11

\ L-
1 1:;.)
_
\
1/

102 · 0 (; ( 4,1 ,lís'<i úi) ::: ( . o'4~7S)

-lt '5 l,lP-- l:>'1

\ \ '2.

So her unpaid balance would be the difference of these two values:

1 f tk - 1)
unpaid balance= Po ( 1 + i)Nk------
d (( +
(t)

11 '> , llhll . q; - <il ,ll 'c>q · 1 lo ~1, 1~I, "I q l 11

3
8. What is Betty's unpaid balance?

l $11i,,ct <1 1 . ,1 1
-
9. 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 S years ago. Using the national average home value
increase of 3.4% per year (this is an exponential growth model!), what is the new value
ofBetty's home? Show you r work. l(D O, 000 L. 0~4) i:; 4 4 o -: l lo G, L--{ 4 O
ICPC:J , 1.p1 0( . 0~ 4)-= t:5Coi4 •'1lP:: 171 ,lJVY,GjtJ
\11, Qto4. 'llo(. O·.1; 4 ) : :- ':J~llP ,1,oq -; \ 1 \.P,~ Z1· l ~'i
l 1lP , q~\ .,u q ( .O'Jil.\)-:; '4,0I ~ ·'tlP = 1 q¡ _c¡qtj . \'2. i
1'b1, jq';;.oq{j (. oi ~) :: lP 11 ~·lB :: 1c. ct , u~. C:JCo
~ I ~'l , 113.i;tp]
10. How much money does Betty have after she sells her house and pays off the mortgage?
1q . 1\ :?i . ry LP - , Q_¡ Lqi:n . 11 ¡{ 'i1, ,, v -3'fJ

When Randy moves out ofhis renta! house, the landlord keeps his security deposit
(they always do ... ). How much money does Randy take away from this renta!? None!

11. 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 = ~1, 11 l.P · 'l.°' - \ 12 . l.9 : ~b-1 v_

o l_
,_1J)
:-E
'J , , l ___

Randy: gains-expenditures= O - 1:Jt:'i 1 lq?J 2~

4
 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.
12. Calculate Betty's monthly house payment, showing your work. Be sure you take the
down payment into account in your loan amount. p0 = 4l \_ )-NI<)
ll + _t
oou.in payment : i;1 ,1t l!> • 3'f -115 0 , ooc:: 1'f2 , i;-q~- lJ>4 - \,:e
- (f)
4 5 )-;o·\1.
\92,9~-3 -l,d~: d ( l - ( l+ ·D _~~ -
_ _ _ _ _ _ -:=- l<i(i .9wl5
19~ ~ &>15 - (.o'-l'll~)
== [itoio .18 - r2-

13. 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.

14. Assuming Betty lives in this house for the next 30 years and continues making the same
house payment each month, what ~ill she spend on housing over the next 30 years?

5
15. Randy rents a house that has the same market value as Betty's, and again the landlo rd
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. What will be
Randy's monthly rent payment? I 1
) i-·---•-------· i
O 2 O. 1u v 1 t; -= 1 lo5 · lá1 \
.. ___ ...... -

16. Assuming he made 12 rent payments and including the security deposit, what did ~--
Randy pay for housing this year? ---- ,,
, eo e;; . ~1 (, 2) =9 l <i> lP • '3 4 t- 1':loo czc,_~_,<t; : J
1--------
$1\ , (p

17. 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 ..!!_ext_~_0_y_e.ars?. ,
7 <o 1 . i:;1 (%o rnoPih.) =- ~21 v,?J1?·2.0+ g,z'j0?_1J11i , 10_5. 1-0 _!

18. How much more did Betty spend over the 30 years?

11.p,, 41 C, . (g - 211s, ,0 5 i º l i'I.1:,1.9_( :

19. 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. Show you~ ______,
J
,so,ooo ( 1 + .0:0'\?º::.. \'¼> (o~ ~-1~
-·

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

6
Betty and Randy at age 60
Suppose Betty a n d Ran d Y contmue
. . where they have been living. Betty's house is

e
ºd to hve
pai off. Randy's landlord decided to raise rent by 10%.

What is Randy's new rent payment? lú,<;."i 1 (. IO) = 1C,-'Jt; 1 1lo"1- ', 1 71,. <,51

20. Supposing neither of them moves and their housing costs remain the same, what will
each of them pay far housing over the next 20 years between the ages of 60 and 80?

Betty: 1~-rry~ hou~e 15 a\rectdy P«t d off

Randy: 41 -1'.> l 14 0 mor>tnsl~___§_j

21. Consider the full SO years that have passed since Betty and Randy moved into Iarger
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.

Randy:

Betty and Randy at age 80

Betty and Randy are getting old now and it's time to move into an assisted living facility.

22. Recall that Betty paid $2SO,OOO far her house SO years ago. Using the national average

work 1')0, 000 l 1 + . o '.J, 4) i;o t

home val u e in crease of 3.4% per year, find the new value of Betty's home. Show your
'.? :.~,'.1,'73 . 1(p J

Does it look like Betty will have financial security in her golden years?
ye~, be cau~e she con se11 h et h <HJ~e a i a \J a \lA€
C\ $ i, ?;1JO . J;tj?,. • UP 3 7
23. 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 rented house as far
as Randy is concerned? 1\) ~ (l t)dy, ht \')O\ASf \S \I Qlúed $0 \e,( {l.lU~
\'\( t\lJ e'>1,t t'Olf\ ª''Y p<lt't o\ \ \ .
In the long term, who carne out financially ahead? Betty or Randy?

~ e\\)) (O\ll-t out fln ondúffltJ llhi,'J q vccause 9)t? VJ0,5

ab\t to f,e\\ ntr· nonH~ o\ a ~1,9h \Ja\ua

Notice that throughout the project, Betty's costs are artificially low dueto 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.