Page 571 - Introduction to Business

CHAPTER 15 Personal Financial Planning 545

$280 car payment leaves $3720. Multiplying that by 0.32 reveals that the family can
afford $1190.40 in monthly payments. After subtracting estimated taxes and insur-
ance costs of $200, a total of $990.40 is left for a mortgage principal and interest
payment.
Assume that the McDonalds plan to obtain a 30-year, 10-percent, fixed-rate
mortgage. A 30-year, 10-percent, fixed-rate mortgage on $110,000 yields mortgage
principal and interest payments of $972.39. That amount is just under the maxi-
mum the McDonalds can pay, $990.40, which was previously calculated.
Closing costs average about 4 percent of the mortgage amount on a new mort-
gage with 2 points. Points are finance charges that are calculated by the lender at
closing. Each point equals 1 percent of the loan amount. For example, 2 points on
a $110,000 loan equals $2200. Typically, points paid are inversely related to the
interest rate charged on the loan. Consequently, the McDonalds must set aside
$4400 of their $20,000 savings, leaving $15,600 for a down payment. They can thus
afford to purchase a $125,000 house, putting $15,000 down (a little more than 12
percent), and have enough income to qualify for a mortgage on the remaining
$110,000 cost of the house. A number of realty, bank, and title company Web pages
offer mortgage calculators to give you a quick idea of what monthly payments may
be on a certain home given the down payment and total cost of the house. Keep in
mind that these calculators are helpful, but will not consider all of the costs that
come with home ownership, and may not reflect the interest rate that you will actu-
ally obtain from your lender.
There are other considerations in purchasing a home. Property insurance will
need to be obtained, and the difference in homeowner’s insurance and renter’s
insurance may be substantial. If a down payment is made that is less than 20 per-
cent of the price of the home, mortgage insurance will also have to be purchased.
There are also regular maintenance costs, and depending on the size of your new
home, utility costs may increase. Homeowner’s association fees and property taxes
should also be considered when determining the cost of purchasing a home.

reality Have you made any investments? Do you prefer high-risk or low-risk
CH ECK investments?

Retirement and Estate Planning

LEARNING OBJECTIVE 6
List retirement and estate planning considerations.

The earlier you start to plan for retirement, the better you can solidify your finan-
cial position. You’ll need a solid nest egg of retirement investments to allow you to
grow old gracefully. When many people reach retirement age, they are financially
unprepared; yet they may live 20 to 30 percent of their entire life span after
retirement.
Most people assume that they will need about 80 percent of their preretirement
income to live comfortably in their later years. In your retirement years, some of
your expenses, such as taxes, will fall; other expenses, such as medical expenses,
will increase.

Social Security
The average American works at least 40 hours a week, and every two weeks or once
a month gets paid for the work she or he has done. Your gross pay is reduced by a
number of deductions such as federal income tax withholdings, social security,

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