Federal taxes for deducting mortgage interest

Problem 1:

Mr. Buck buys a condominium for $196,000. The following costs are associated with this purchase and due at closing.

20% Down payment is required ?
Loan Fee (1 point) ?
Appraisal Fee $375
Title Insurance $925
Document and Recording fee $170
Prorated property taxes $2685
Prorated property insurance $1495

a) The buyer is required to pay for closing costs with cashier's check. Calculate the amount of the cashier's check that Mr. Buck will need for his closing. Show work...

b) The mortgage for this condo is a 20 year fixed rate mortgage with a 4.5% interest rate calculate the monthly payment (principal and interest only). Show work...

c) Mortgage interest is tax deductible and Mr. Buck is in the 25% federal tax bracket. How much money will Mr. Buck get back in federal taxes for deducting his mortgage interest in the first year? Show work...

d) When considering the tax savings in the first year, what is the net monthly mortgage expense for this loan (principal and interest only)? Show work.

e) Originally, Mr. Buck was going to finance the condo with a 30 year fix rate mortgage at 5%. How much interest did he save over the life of the loan by going with the 20 year loan instead of the 30 year loan (assume he has no late or early payments)? Also, is saving interest on a 20 year loan always better financially then choosing a 30 year loan? What other factors should he consider when comparing the two loans? Show work.

Question 2:

Ms. Dough, a 421 year old single woman with no children, is currently renting a townhouse for $1,175 per month and pays $105 per month for renters insurance. She just came into money and is trying to determine if she would be better off financially if she buys the townhouse instead of renting it. The cost to buy the townhouse is $110,000. She is preapproved for a 30 year fixed rate mortgage of 5% and as the owner she would be responsible to pay the annual taxes of $1,950 and annual insurance of $2,125.

a) Calculate the total monthly cost if Ms. Dough was to purchase this townhouse assume no down payment). Show work.
b) Would you recommend that she buys the townhouse or should she continue to rent? Please give justification for your recommendation (show comparison of total monthly cost).

In addition to her housing issue, she is trying to decide if she should use some of her money to pay off her car loan. She is currently paying $357.50 per month with 24 remaining payments and an APR of 9.5%.

c) Use the actuarial method to find the payoff amount and the amount of interest Ms. Dough would save if she paid off the car with 24 remaining payments. Show work.

d) Ms. Dough found an investment that pays 4.5% interest compounded monthly for 2 years. Would she make more by investing the money instead of paying off the car?

Finally, Ms. Dough has about $25,000 left after resolving her housing and car questions. Also she has $1,756 of credit card debt at 18% interest and about $9,000 in a Roth IRA with no other retirement savings.

e) Based on these conditions, how would you advise Ms. Dough with regards to the $25,000 that is left over? Please be specific and give justification for each recommendation.

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Finance Basics: Federal taxes for deducting mortgage interest
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