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James Monroe lives in a structure that resembles a home, but has only one similar and separate structure attached to his dwelling. What type of housing is James most likely living in?

A condominium
A duplex
A cooperative
A prefabricated home
A single family dwelling

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Patrina Schowalter
Patrina SchowalterLv2
29 Sep 2019

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  1. James Hunt’s Dream Apartment

Part 1

James Hunt currently earns a yearly salary of $100,000(paid on a monthly basis at the end of each month) and his averageincome tax rate is 25% (taxes are withheld by the employer from theemployee’s gross monthly pay). He wishes to buy an apartment inBoston. He can obtain from his bank a 30-year fixed rate mortgageloan at a nominal interest rate of 4.75% per annum, with equalmonthly payments paid at the end of each month.

James also has accumulated $150,000 in savings, which heholds in a separate bank account.

He figures that all other housing-related expenses(e.g., condominium fees, utilities, insurance, and property taxes)should come up to a total of about $500/month (assume that theseexpenses are all paid at the end of each month).

As he is trying to figure out how much he can afford topay for the apartment of his dreams, he suddenly remembers theadvice his mother once gave him:

  • Do not spend more than 1/3 of your monthly disposabletake-home pay on housing costs (mortgage and all otherhousing-related expenses); and,
  • Always keep a minimum of $50,000 available at all timesin your savings account, in case of an emergency.

Given all the information above, and if he follows hismother’s advice, what is the maximum price that James can afford topay for the apartment?

Part 2

Four years after having purchased the apartment, Jameslearns that mortgage interest rates have substantially declined dueto the recession and to the Federal Reserve Bank’s aggressiveexpansionary monetary policy. He currently still owes $283,333 onhis loan principal.

The 30-year mortgage interest rate is now at 4% and a15-year rate at 3.50%. In addition, his annual salary base is now$125,000, as a result of a recent promotion, and his savingsaccount was partially replenished and now stands at$80,000.

Rather than lowering his monthly mortgage payments,James is more interested in shortening the maturity of hismortgage, so as to save a substantial amount of future interestpayments. As a result, he wishes to switch from a 30-year to a 15year mortgage at 3.50%.

Assume that his average tax rate is now 30% , thathousing-related costs are now $600 instead of $500, and that theclosing costs (legal and processing fees to modify the mortgage)are approximately $5,000, payable at closing (when the new loan isapproved).

Assuming that James continues to strictly follow hisMom’s recommendations,

  1. How much of the existing loan principal would he haveto repay upfront before setting up the new loan? (Include theclosing costs to the amount).
  2. What is the total amount of interest that he would saveover the entire duration of the loan if he were to refinance it(i.e., switch to the 15-year mortgage loan mentionedabove)?
  3. Can he afford to refinance his loan, all thingsconsidered? Should he do it? Explain.

Joe and Lisa White are a married couple. Joe is 63 and Lisa is 61. Joe is thinking about retiring in a few years, and the Whites have come to you for an insurance evaluation. Lisa plans to continue working even after Joe retires. The following provides a summary of the Whites’ insurance planning situation.

Life Insurance

Joe owns a $500,000 universal life insurance policy. Joe is the insured and their son David, age 37, is the beneficiary. The policy has a cash value of $50,000 and a living benefits provision; all account earnings are used to offset premium expenses. Lisa owns a 20 year $350,000 level term life policy that she purchased five years ago. She pays approximately $1,000 per year in premium costs. Lisa is the insured and Joe is the beneficiary.

Property and casualty insurance

Joe and Lisa own a home as JTWROS. The home has a market and replacement value of $675,000. The house is insured with the standard HO-3 policy for $550,000. The policy requires that the Whites pay a $500 deductible per claim occurrence. Other provisions include the following:

10% coverage on detached structures

Coverage up to $250 for cash

Coverage up to $1,500 for collectibles, artwork, and similar assets

Personal property contents coverage equal to 20% of the insured dwelling

Living expenses coverage for six months

Coverage up to $100,000 for personal liability

A replacement cost coverage endorsement is in place

The Whites’ two cars are insured under a personal automobile policy with split limit coverage of 250,000/500,000/50,000. They also have a $1 million excess liability policy.

Health insurance

The Whites are covered under Lisa’s group health insurance plan. The traditional plan has a lifetime maximum benefit equal to $5 million for the family, a $500 per person deductible, and an 80% coinsurance clause, with the family stop-loss limit of $2,500.

Using this information, please answer the following questions.

5. If the Whites sustain an $90,000 loss to their dwelling from a fire, how much will the insurance company pay (after the deductible) toward the dwelling loss claim? Justify your answer. Show all computations.

5A. $550,000

5B. $55,000

5C. $89,500

5D. $90,000

6. Lisa believes that her husband is a reckless driver. She worries about what would happen if he were ever in a serious car accident. If Joe is involved in a car accident and causes physical harm to another motorist in the amount of $300,000, how much will be paid from the personal automobile policy (PAP) and how much from the excess liability policy? Show your computations.

6A. $300,000 PAP and $0 excess liability

6B. $0 PAP and $300,000 excess liability

6C. $150,000 PAP and $150,000 excess liability

6D. $50,000 PAP and $250,000 excess liability

6E. $250,000 PAP and $50,000 excess liability

Joe and Lisa White are a married couple. Joe is 63 and Lisa is 61. Joe is thinking about retiring in a few years, and the Whites have come to you for an insurance evaluation. Lisa plans to continue working even after Joe retires. The following provides a summary of the Whites’ insurance planning situation.

Life Insurance

Joe owns a $500,000 universal life insurance policy. Joe is the insured and their son David, age 37, is the beneficiary. The policy has a cash value of $50,000 and a living benefits provision; all account earnings are used to offset premium expenses. Lisa owns a 20 year $350,000 level term life policy that she purchased five years ago. She pays approximately $1,000 per year in premium costs. Lisa is the insured and Joe is the beneficiary.

Property and casualty insurance

Joe and Lisa own a home as JTWROS. The home has a market and replacement value of $675,000. The house is insured with the standard HO-3 policy for $550,000. The policy requires that the Whites pay a $500 deductible per claim occurrence. Other provisions include the following:

10% coverage on detached structures

Coverage up to $250 for cash

Coverage up to $1,500 for collectibles, artwork, and similar assets

Personal property contents coverage equal to 20% of the insured dwelling

Living expenses coverage for six months

Coverage up to $100,000 for personal liability

A replacement cost coverage endorsement is in place

The Whites’ two cars are insured under a personal automobile policy with split limit coverage of 250,000/500,000/50,000. They also have a $1 million excess liability policy.

Health insurance

The Whites are covered under Lisa’s group health insurance plan. The traditional plan has a lifetime maximum benefit equal to $5 million for the family, a $500 per person deductible, and an 80% coinsurance clause, with the family stop-loss limit of $2,500.

Using this information, please answer the following questions.

9. The Whites are curious about the alternatives available when planning for possible nursing home care costs in the future. They have discussed Medicare, Medicaid, and using their savings. What would you recommend for the Whites and why?

10. Currently neither Joe nor Lisa has disability insurance coverage. Joe and Lisa would like more information from you about disability insurance. What recommendations would you make to them? Include a discussion of the elimination period, taxation of benefits, own-occupation vs any-occupation, and guaranteed renewable options.

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