Dr. Lotfi K.GAAFAR

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ENGR 345Engineering Economy
Dr. Lotfi K.GAAFAR Eng. Ahmed Salah RIFKY
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CASE STUDY Financing a House
When a person or a couple decide to purchase a
house, one of the most important considerations
is the financing. There are many methods of
financing the purchase of residential property,
each having advantages which make it the method
of choice under a given set of circumstances. The
selection of one method from several for a given
set of conditions is the topic of this case
study. Three methods of financing are described
in detail. Plan A and B are evaluated you are
asked to evaluate plan C and perform some
additional analyses.
The criterion used here is Select the financing
plan which has the largest amount of money
remaining at the end of a 10-year period.
Therefore, calculate the future worth of each
plan, and select the one with the largest future
worth value.
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Plan Description
A 30-year fixed rate of 10 per year interest, 5 down payment
B 30-year adjustable-rate mortgage (ARM), 9 first 3 years, 9.5 in year 4, 10 in year 5 through 10 (assumed), 5 down payment
C 15-year fixed rate of 9.5 per year interest, 5 down payment

• Other information
• Price of house is 150,000.
• House will be sold in 10 years for 170,000
  (net proceeds after selling expenses).
• Taxes and insurance (TI) are 300 per month.
• Amount available maximum of 40,000 for down
  payment, 1600 per month,
• including TI.
• New loan expenses origination fee of 1,
  appraisal fee 300, survey fee 200,
• attorneys fee 200, processing fee 350,
  escrow fees 150, other costs 300.
• Any money not spent on the down payment or
  monthly payments will earn tax-free
• interest at 0.25 per month.

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Case Study Exercises 1- Evaluate plan C and
select the best financing method. 2- What is the
total amount of interest paid in plan A through
the 10-year period? 3- What is the total amount
of interest paid in plan B through year 4? 4-
What is the maximum amount of money available for
a down payment under plan A, if 40,000 is the
total amount available? 5- By how much does the
payment increase I plan A for each 1 increase in
interest rate? 6- If you wanted to buy
down the interest rate from 10 to 9 in plan A,
how much extra down payment would you have to
make?
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ANSWERS
1- Evaluate plan C and select the best financing
method.
Price 150,000
Down Payment 7,500
Other Initial Costs 2,925
Total Initial Costs 10,425
Salvage Value 170,000
Available Money/month 1,600
Available Money 40,000
Loan for 142,500
Months 180
Interest/month 0.79
Payments/Month 1,488.02
Actual Payment (TI) 1,788.02
Money not spend at present 29,575
The Actual Payment (TI) exceeds the monthly
available limit. Thus, Plan C is discarded.
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2- What is the total amount of interest paid in
plan A through the 10-year period?
Plan A Interest 0.83
Loan Payments
142,500.00 1,250.54
385,753.41 256,166.73 FW at t120
Balance at t120 129,586.68
Paid amount of loan 12,913.32
Interest Paid 243,253.41
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3- What is the total amount of interest paid in
plan B through year 4?
Plan B Interest 0.79
Payment1payment of 0lttlt4at t4 51,611.15
Payment2payment of 4lttlt5 at t4 14,989.56
Total Payments (1) 47,184.88
Total Payments at t4 years 66,600.71
Balance at end of year 4 138,132.42
Paid amount of loan 4,367.58
Interest Paid 62,233.13
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4- What is the maximum amount of money available
for a down payment under plan A, if 40,000 is
the total amount available?
Available Cash 40,000
Origination Fee 1,126.26
Money Upfront 40,000
Money For DP using goal seek 37,373.74
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5- By how much does the payment increase I plan A
for each 1 increase in interest rate?
Interest Monthly Interest Payment
10 0.83 1,250.54
11 0.92 1,357.06
12 1.00 1,465.77
13 1.08 1,576.33
14 1.17 1,688.44
15 1.25 1,801.83
16 1.33 1,916.28
17 1.42 2,031.59
18 1.50 2,147.60
19 1.58 2,264.17
20 1.67 2,381.20
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6- If you wanted to buy down the interest rate
from 10 to 9 in plan A, how much extra down
payment would you have to make?
Payment at i10 1,250.54
Payment at i9 1,146.59
Difference 103.95
Interest9/12 0.75
PV (difference) 12,919.38