Group 7

Riley Vance
Joshua Hansen
Brandon Castaneda
Sage Strate
Talia Ybarguen
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.

2.​ ​Assuming she made 12 mortgage payments and including her down payment, what did Betty
pay for housing this year?

3.​ A
​ ssuming Betty continues to make the payment above, how much will she pay 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.
4.​ ​Calculate Randy’s monthly rent payment:

5.​ ​Assuming Randy made 12 rent payments and including the security deposit, what did he pay
for housing this year?

6.​ H
​ ow much will he pay over 5 years?

7.​ H
​ ow much more has Betty spent on housing during the 5 years?
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:

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

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

8. Calculate Betty’s pay off balance:

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.

10. How much money does Betty have after she sells her house and pays off the mortgage?

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!

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 =

Randy: gains – expenditures =

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.

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 will she spend on housing over the next 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.

16. Assuming he made 12 rent payments and including the security deposit, what did Randy pay
for 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?

18. How much more did Betty spend over the 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.
The value of Randy’s apartment is his landlord’s asset, not Randy’s! To Randy the value of his
rented house is $0.

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?

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:

Randy:

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 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.

Does it look like Betty will have financial security in her golden years?

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?

In the long term, who came out financially ahead? Betty or Randy?

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/

Finance Reflection

This module has been one of the most rewarding in terms of real-life practicality. It is one

thing to use formulas in order to pass an upcoming math test; however, to be able to see the

benefits as soon as you start is another thing altogether. Math has always been a subject where

many either grumble or they sigh out of annoyance, but now it is more enjoyable than ever

before. Yes, it would not be the first subject of choice for many, but at least this module alone

has proven why math is not only practical but also beneficial.

Being relatively young, most of us have grappled or will grapple with the question, “to

buy or not to buy?” Currently many are discouraged from first purchasing a home when first

starting out because of the commitments one would make. As the homeowner, the responsibility

rests solely on your shoulders and not another’s, unless you have a warranty on certain

household items. Whereas, if you were to rent, the financial burden would rest on the shoulders

of the landlord. Honestly, that option has a real appeal to it.

 Working through the group project, we noticed that Betty always had the upper hand in

the matter. It was in one instance where she was out more money than Randy; unfortunately,

when it came time for Randy to move, he had absolutely nothing to show. Betty was the wiser

because she was investing her money unlike Randy where there was no investment, but only

expenditures! The first time Betty moved out and bought a bigger home, she had a substantial

down payment which lowered her monthly mortgage payments. Unfortunately, but foreseeable,

Randy left with nothing. As the years went on Betty’s home grew in value and her monthly

payments were always secure and not subject to being raised. Not only did we see that was she

investing in her life currently, but Betty was thinking about the big picture.

One could easily be equipped to make a sound financial argument by this module and

group project alone. There are very good investments and poor ones. We would rather invest our

money and freedom to gain a bigger payout than putting the money into a bag with holes, plus

we do not even own the bag! There are more dividends to be made than there are subtractions

with purchasing a home. Simply living in a house for five years before moving again would be a

help more than a hurt. If the home is of a lower value, then again you could invest more of your

resources to raise the value which would ultimately benefit you!