Tom And Nancy Want To Buy A House In A Neighborhood

Tom And Nancy Want To Buy A House In A Particular Neighborhood They H

Tom and Nancy want to buy a house in a particular neighborhood. They have two children ages 1 and 4. The average price home in this neighborhood runs about $350,000. Together their family income is $100,000. They have saved $75,000. The home they want to purchase is a newly constructed dwelling that costs $300,000. Taxes on the home run $3.00 per $100 of assessed value of the home. For new homes, the assessed value is equal to 75% of the purchase price. Insurance costs half of one percent of the home's assessed value.

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Introduction

The decision to purchase a home is one of the most significant financial commitments a family can make, involving considerations of affordability, long-term investment, and personal circumstances. For Tom and Nancy, who are considering purchasing a newly built home within a particular neighborhood, it is crucial to evaluate whether their financial situation aligns with the costs associated with the home they desire. This paper explores their income, savings, and the specifics of the home's costs—including taxes and insurance—to determine their financial feasibility for this purchase.

Assessing Purchase Price and Savings

Tom and Nancy have saved $75,000, which represents 25% of the home’s purchase price of $300,000. This substantial down payment positions them favorably by reducing their mortgage amount and possibly avoiding private mortgage insurance (PMI). Typically, a higher down payment decreases monthly mortgage payments and interest costs over the loan's term. According to industry standards, a down payment of at least 20% is often recommended to secure favorable loan terms (Fannie Mae, 2021). Their current savings demonstrate a strong ability to meet this threshold.

Family Income and Affordability

With a combined family income of $100,000 annually, Tom and Nancy’s gross income translates to approximately $8,333 per month. Conventional mortgage guidelines suggest that monthly housing costs—including mortgage payments, taxes, and insurance—should not exceed 28% to 30% of gross monthly income (FHFA, 2020). Thus, their maximum affordable housing cost would be roughly $2,500 to $2,500 per month.

Calculating Property Taxes

The annual property taxes are calculated at $3.00 per $100 of assessed value. Since the assessed value is 75% of the purchase price for new homes, the assessed value for this home is 0.75 × $300,000 = $225,000.

Monthly property taxes are therefore:

(225,000 / 100) × $3.00 = 2,250 × $3.00 = $6,750 per year

Monthly taxes = $6,750 / 12 = $562.50

Estimating Homeowners Insurance

Homeowners insurance costs are estimated at 0.5% (half of one percent) of the assessed value:

Insurance = 0.005 × $225,000 = $1,125 annually

Monthly insurance costs = $1,125 / 12 ≈ $93.75

Calculating Mortgage Payments

Assuming a standard 30-year fixed mortgage with an interest rate of approximately 4%, the mortgage amount after their down payment would be:

Mortgage principal = $300,000 - $75,000 = $225,000

Using the formula for fixed-rate mortgages, their estimated monthly principal and interest payment would be approximately $1,075 (reference: Bankrate, 2023).

Adding taxes and insurance, total monthly housing payments would be:

$1,075 (mortgage) + $562.50 (taxes) + $93.75 (insurance) ≈ $1,731.25

This total is well within their affordable range based on their gross income (less than 21% of gross monthly income), suggesting financial feasibility.

Other Factors to Consider

Beyond the immediate costs, the family must also account for additional expenses, including maintenance, utilities, and other costs associated with homeownership (DiPasquale & Wheaton, 1996). Given their family size and children, they should consider proximity to schools and amenities, which might influence their overall budget.

Furthermore, their savings amount, while sufficient for a down payment, should also cover emergency funds and closing costs, which typically amount to 2-5% of the home's price (U.S. Department of Housing and Urban Development, 2022).

Conclusion

Based on the detailed financial analysis, Tom and Nancy are in a strong position to purchase their targeted $300,000 home. Their savings cover a substantial down payment, and their monthly mortgage, taxes, and insurance costs are manageable within their income. However, it is prudent for them to review their full budget, including ongoing expenses, to ensure they maintain adequate financial stability throughout homeownership. Consulting with a financial advisor and mortgage professional can provide personalized guidance, but preliminary assessments indicate that purchasing this home aligns well with their current financial situation.

References

Bankrate. (2023). Mortgage Calculator. https://www.bankrate.com/mortgages/mortgage-calculator/

DiPasquale, D., & Wheaton, W. C. (1996). Urban Economics and Real Estate Markets. Prentice Hall.

Fannie Mae. (2021). Down Payment Strategies. https://www.fanniemae.com/

Federal Housing Finance Agency. (2020). Housing Expense Ratio Standards. https://www.fhfa.gov/

U.S. Department of Housing and Urban Development. (2022). Home Buying Costs. https://www.hud.gov/