Cade Tyrell

Math 1030 – Fortin

9 March 2019
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%.
1. Calculate Betty’s monthly house payment, showing your work. Be sure you take the
down payment into account in your loan amount.
Loan Amount after down payment: $144,000
144000(0.04875/12)=585 / [1-(1+r/k)^-Nk]
[1-(1+.04875/12)^-360] = 0.767656249
585/.767656249= $762.059 monthly house payment

2. Assuming she made 12 mortgage payments and including her down payment, what did
Betty pay for housing this year?
$762.06(12months)=$9177.72+$16000= $25,144.72 on housing this year
3. Assuming Betty continues to make the payment above, how much will she pay over 5
years?
First year=$25,144.72 + $762.06(48months), so 25,144.72+36,578.88= $61,723.60 over
5 years

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.
$762.06 (.75) = $571.545 + $1000= $1571.55 first payment
4. Calculate Randy’s monthly rent payment: $571.55 per month after security deposit

5. Assuming Randy made 12 rent payments and including the security deposit, what did
he pay for housing this year?
571.55(12months)=$6,858.60+$1000 down payment=$7,858.60 on housing this year

6. How much will he pay over 5 years?

571.55(60 months)=$34,293 + $1,000 = $35,293 over 5 years

7. How much more has Betty spent on housing during the 5 years?
Betty spent $26,430.60 more than Randy on housing over 5 years, due to her higher initial
down payment and higher monthly payments.

Betty and Randy at age 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 of view.
They could have invested the principal and earned interest on it. So after 5 years with
interested compounded monthly the bank would have earned:

Nk
 r
A = P0 1 + 
 k
A=144000principal(1+.04875/12)^60 = $183,656.9324 is the total amount for 5 year loan
@ interest rate of 4.875%

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And Betty has been paying into an annuity for 5 years so she has paid

PN =
(
d (1 + kr )
Nk
−1 )
( )
r
k

P5= $762.06[(1+.04875/12)^60 -1] / (.04875/12) = $51,659.76

Her monthly payment = $762.06(60months)=$45,723.6, so she paid 5,636.16 in interest

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

 r
pay off = P0 1 + 
Nk

−
(
d (1 + kr )
Nk
)
−1
 k ( kr )

8. Calculate Betty’s pay off balance:

183,656.93-51,659.76=$131,997.17

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 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. Show your work.
Exponential explicit equation:
160,000(1+.034)^5 = $189,113.56 is the value of Betty’s house after 5 years.

10. How much money does Betty have after she sells her house and pays off the mortgage?
$189,113.56-$131,997.17=$57,116.39

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!

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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 =

Sold house $189,113.56 – $16,000 down payment - $131,997.17 loan payoff -$45,723.60
for 60 months of payments = Net Loss $4,607.21 over 5 years

Randy: gains – expenditures =

No gains - 571.55(60 months)=$34,293 + $1,000 deposit = Net loss $35,293 over 5 years

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.
$57,116.39 left after selling house and paying off mortgage.
$250,000-$57,116.39=$192,883.61 is the new loan amount.
Using 3rd Finance Equation
192,883.61(0.04875/12)=783.6/[1-(1+r/k)^-Nk]
[1-(1+0.04875/12)^-360] = 0.767656249
783.6/0.767656249= $1,020.77 is the new monthly payment
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.
$1020.77(12 months) = $12,249.24 spent on housing this year

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14. 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?
12 mo/yr (30 years) =360
$1020.77(360 months) = $367,477.20 spent on housing over 30 years

15. 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. Calculate Randy’s
monthly rent payment.

$1020.77 (.75) = $765.58 monthly rent payment after security deposit.

16. Assuming he made 12 rent payments and including the security deposit, what did
Randy pay for housing this year?
765.58 (12 months) = $9,186.96 +$2500 deposit = $11,686.96 spend on housing this year

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 next 30 years?
765.58 (360 months) = $275,608.80 +$2500 deposit = $278,108.80 spent over 30 years

18. How much more did Betty spend over the 30 years?
$367,477.20-$278,108.80= Betty spent $89,368.40 more than Randy over 30 years.

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 your work.
Exponential explicit equation:
250,000(1+.034)^30 = $681,641.73 is the value of Betty’s house after 30 years.

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

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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?
765.58(.10) = 76.558+765.58=$842.14 is Randy’s new monthly payment.
20. 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:
She no longer has a house payment because her house and mortgage were payed off. Now
she just needs to pay for maintenance, utilities, etc.)
Randy:
20 years is 240 months(842.14) = $202,113.60 in rent payments over next 20 years
21. 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:
$367,477.20 spent on housing over 30 years+Last 20 years, own home so $0 =$367,477.20
over 50 years
Randy:
$278,108.80 spent over 30 years+$202,113.60 in payments over next 20 years
=$480,222.40 over 50 years
Randy spent more than Betty on housing because he chose to rent instead of buying a home,
resulting in payments from age 60-80 that Betty didn’t have to pay because she already
owned her house at that point.

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 $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. Show your
work.
Exponential explicit equation:
250,000(1+.034)^50 = $1,330,353.163 is the value of Betty’s house after 50 years.

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 Does it look like Betty will have financial security in her golden years?
Yes! Betty can sell her house and have plenty of money to live leisurely with 1M in hand.
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 rent house as far as
Randy is concerned?
Randy’s apartment is his landlord’s asset, not Randy’s. His house is valued at $0 to him
because he does not own any part of it.

In the long term, who came out financially ahead? Betty or Randy?
Betty is much more financially ahead than Randy because she has assets from selling her
home, and her home gained a lot of value over 50 years.

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/

Below:

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 Rent vs Buy Project Reflection
This project taught me a lot about how to better prepare for future financial
decisions and which options are better in certain situations. I think the part of this unit that
had the biggest impact on me was learning how much interest rates affect almost every
aspect of finances from savings to loans. I currently do my banking with a credit union, and
they pay about nothing in interest. I have the opportunity to move my savings to an account
that earns 2.2% -- it seemed like nothing at first but after this unit I’m much more inclined
to make the switch. This unit was so influential because all the calculator problems are real
scenarios that can be applied to different aspects of our lives. I won’t have my own place to
live for some time, but I know for sure I will be putting money towards owning a house
unless I’m only renting for a short period. Also, now I know how interest rates work so I
can protect myself when getting a loan for something like a car or setting up a savings.
Throughout the finance projects, especially this one, I have been able to determine
the best ways to spend your money. Randy’s situation with renting for 50 years is
extremely undesirable because to me, renting now just feels like throwing money away. In
a rent situation, you pay every month towards something you’ll never own, which leaves
you with no assets once you decide to stop renting. Now, this might be nice for a short-term
living situation, because purchasing a home is a big decision and many people don’t want to
commit to one earlier in life. Overall, working towards owning a home seems to be the
most financially sound decision to make for the future. Betty spent less overall on housing
during her life, yet ended up with a much larger sum of money than Randy after moving out
of her house because her home tremendously increased in value over the years. Investing
in real estate seems to be something I should do, considering it is the one thing you can
invest in and be sure that money won’t be lost over time. Land values are not going to
decrease as population grows.
Investments are important for financial security, and I’m glad we learned how to
solve them, because most of it is just figuring out which variables go where to make the
equation work. Knowledge of financial formulas can help everyone make life-impacting
decisions. This way, I can be my own “financial advisor” for free instead of needing to get
help from someone else I’d pay just to figure out interest, annuities, loans, etc. It is smart to
make a budget & financial goals and I think the formulas are beneficial to making accurate
predictions of where my money is going. This unit is the most outside-class
applicable/beneficial one we have done so far, and I really enjoyed it!