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# Financial Planning Service Charges

1. Deborah Tan is a registered nurse who earns \$3250 per month after taxes. She has been reviewing her savings strategies and current banking arrangements to determine if she should make any changes. Deborah has a regular checking account that charges her a flat fee per month, writes and average of 18 checks a month, and carries an average balance of \$795 (although it has fallen below \$750 during 3 months of the past year). Her only other account is a money market deposit account with a balance of \$4250. She tries to make regular monthly deposits of \$50-\$100 into her money market account but has done so only about every other month.
Of the many checking accounts Deborah's bank offers, here are the 3 that best suit her:
1. Regular Checking, per-item plan: Service charge of \$3 per month plus 35 cents per check.
2. Regular Checking, flat-fee plan (the one Deborah currently has): Monthly fee of \$7 regardless of how many checks written. With either of these regular checking accounts, she can avoid any charges by keeping a minimum daily balance of \$750.
3. Interest Checking: Monthly service charge of \$7; interest of 3%, compounded daily (refer to Ex 4.8 - 3.05%). With a minimum balance of \$1500, the monthly charge is waived.
Deborah's bank also offers certificates of deposit for a minimum deposit of \$500; the current annual interest rates are 3.5% for 6 months, 3.75% for 1 year, and 4% for 2 years.

1. Calculate the annual cost of each of the three accounts, assuming that Deborah's banking habits remain the same. Which plan would you recommend and why?
2. Should Deborah consider opening the interest checking account and increasing her minimum balance to at least \$1,500 to avoid service charges? Explain your answer.
3. What other advice would you give Deborah about her Checking account and savings strategy?

2. Michelle and Ken Dunn, both in their mid-20s, have been married for 4 years and have 2 preschool age children. Ken has an accounting degree and is employed as a cost accountant at an annual salary of \$62,000. They're now renting a duplex but wish to buy a home in the suburbs of their rapidly developing city. They've decided they can afford a \$215,000 house and hope to find one with the features they desire in a good neighborhood.
The insurance costs on such a home are expected to be \$800 per year, taxes are expected to be \$2,500 per year, and annual utility bills are estimated at \$1,440?and increase of \$500 over those they pay in the duplex. The Dunns are considering financing their home with a fixed-rate 30 year, 6% mortgage. The lender charges 2 points on mortgages with 20% down and 3 points if less than 20% is put down (the commercial bank the Dunns will deal with requires a min of 10% sown). Other closing costs are estimated at 5% of the home's purchase price. Because of their excellent credit record, the bank will probably be willing to let the Dunns' monthly mortgage payments (principal and interest portions) equal as much as 28% of their monthly gross income. Since getting married, the Dunns have been saving for the purchase of a home and now have \$44,000 in their savings account.

1. How much would the Dunns have to put down if the lender required 20% down? Could they afford it?
A: 20% down = 215,000 X .20 = 43,000. Yes, and they would have \$1000 left over.
2. Given that the Dunnds want to put only \$25,000 down, how much would closing costs be? Considering only principal and interest, how much would their monthly mortgage payments be? Would they qualify for a loan using a 28% affordability ratio?
3. Using a \$25,000 down payment on a \$215,000 home, what would the Dunns loan to value ration be? Calculate the monthly mortgage payments on a PITI basis.
4. What recommendations would you make to the Dunns?

#### Solution Preview

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P.S. There are 2 worksheets - Q1 and Q2

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1. Deborah Tan is a registered nurse who earns \$3250 per month after taxes. She has been reviewing her savings strategies and current banking arrangements to determine if she should make any changes. Deborah has a regular checking account that charges her a flat fee per month, writes and average of 18 checks a month, and carries an average balance of \$795 (although it has fallen below \$750 during 3 months of the past year). Her only other account is a money market deposit account with a balance of \$4250. She tries to make regular monthly deposits of \$50-\$100 into her money market account but has done so only about every other month.
Of the many checking accounts Deborah's bank offers, here are the 3 that best suit her:
1. Regular Checking, per-item plan: Service charge of \$3 per month plus 35 cents per ...

#### Solution Summary

Financial planning service charges are examined. The expert calculates the annual cost of each three accounts.

\$2.19