Real Housing Villain Case Study Assingment Analysis Help With Solution
The real housing villain is on cable.
By JIM SOLLISCH
So now we know what happens when too many people who have too few assets buy too much house with the help of too many risky mortgage products and too little oversight. And while there’s plenty of blame to go around — unethical mortgage brokers, greedy bankers and irresponsible homeowners — one culprit continues to get off scot-free: HGTV.
That’s right. The cable network HGTV is the real villain of the economic meltdown. As the viewership reached a critical mass over the past decade — HGTV is now broadcast into 91 million homes — homeowners began experiencing deep angst. Suddenly no one but the most slovenly and unambitious were satisfied with their houses. It didn’t matter if you lived in an apartment or a gated community, one episode of “House Hunters” or “What’s My House Worth?” and you were convinced you needed more. More square feet. More granite. More stainless steel appliances. More landscaping. More media rooms. More style. You deserved it.
If you had any doubts about your ability to afford such luxuries, all you had to do was look at the 20-something couple in the latest episode choosing between three houses. Should they go for the fixer-upper, priced at $425,000? Or the one with the pool for $550,000? What about the one with room to grow for $675,000?
“How much money can these people possibly make?” I shout at my wife before wrestling the remote from her house-hungry little hand and switching it to the nearest sports program. “The guy can barely string together two sentences!”
And yet on episode after episode for this entire irrational decade, HGTV pumped up the housing bubble by parading the most mediocre, unworthy-looking homeowners into our living rooms to watch while they put their tacky, run-of-the-mill tract homes on the market for twice what they paid and then went out and bought houses with price tags too obscene to repeat. You couldn’t watch these shows without concluding that you must be an idiot and a loser if you lived in a house you could actually afford.
HGTV is an evil empire that never rests. You can loathe your current domicile 24/7 with programs such as “Stagers” (move a few things around and double the value of your home); “Designed to Sell” (you can sell your house, even if the house next to yours is in foreclosure); “Design on a Dime” (see, it’s cheap); and “Property Virgins” (losing your virginity was fun, wasn’t it?) Every show features highly attractive hosts who show you how to “unlock the hidden potential” in your home, how to turn a $10 thrift-store table into a “wow” media center, and how to make everything “pop.” Pop is the word of choice on HGTV.
Ironic, isn’t it, given the fact that pop is the sound we keep hearing from the McMansion-sized housing bubble HGTV created
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Make a note of the rates. However, for below, we will assume a 4.1% rate. For a 30-year average fixed rate at 4.1%, what would be your monthly payment if you took out a 30-year loan on $250,000?
PMT = ____________
2. If you decided to pay 1 point, you could reduce your rate by .25% (For example: from 6% to 5.75%.) Assume you decided to pay one point on the loan above. Using your lowered mortgage rate, calculate your monthly payment on the 30-year $250,000 loan.
PMT with Point = ____________
3. From question 2, what would be your up-front payment if you paid 1 point? i.e. What is the cost of the point? Google search mortgage points if you don’t know what they are.
Up front payment = _________________
4. Now, you should find the monthly payment calculated from question 3 to be less than the monthly payment calculated from question 2.
How much did you save per month by taking the point?
A. Savings per month = _______________
How long do you need to hold on to the loan to justify taking the loan with the one point? I.E. How long does it take you to recoup the cost of the point via the lower mortgage rate? Specify in months. Ex. Say you save $10 and the point cost you $200, it would take 20 months to recoup the cost. This is not the answer by the way.
B. Number of months = ___________________
5. Now determine the monthly mortgage payment if you took out a 15-year loan instead (ignore the point). Go back to bankrate.com, click on mortgage, 15 year. You will note that is lower than the 30 year rate. For our purposes, assume the rate is 3.3%. http://www.bankrate.com/funnel/mortgages/mortgage-results.aspx?ic_id=CR_SearchMtgProdTypeProduct&prods=2
PMT = ____________
6. Calculate your total payments from the 15-year loan at 3.3% and for the 30-year loan at 4.1% without the point. How much do you save in interest by taking the 15-year loan? Don’t forget the total interest for each loan is the total amount paid minus the principal of $250,000.
Total paid on 30 year loan = ______________ – $250,000 = total interest paid = ____________________
Total paid on 15 year loan = ______________ – $250,000 = total interest paid = ____________________
Would save ___________________ in interest.
7. Now let’s look at refinancing. You should have read the article “Refinancing: Whom Can You Trust” in this document. Assume you took out a 6% 30 year fixed rate loan 5 years ago for $250,000. You can now refinance the loan at 5% with 3% closing costs based on the loan amount. If you refinance, you will refinance for 25 years so the loan term will not be extended.
What is the current remaining balance on the original 6% 30 year loan after 5 years? _________________
8. Explain why one should or should not refinance based on the 1% rule. Consider critical points made in the article. Determine how long you would have to stay in the house to recoup the closing costs.
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