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# Alex Guadet of Forrest Ci

Alex Guadet of Forrest City, Arkansas, has been renting a small, two-bedroom house forseveral years. He pays \$900 per month in rent for the home and \$300 per year in property and liabilityinsurance. The owner of the house wants to sell it, and Phillip is considering making an offer. The ownerwants \$130,000 for the property, but Phillip thinks he could get the house for \$125,000 and use his \$25,000in 3 percent certificates of deposit that are ready to mature for the down payment. Alex has talked to his banker and could get a 5.5 percent mortgage loan for 25 years to finance the remainder of the purchase price. The banker advised Alex that he would reduce his debt principal by \$2200 during the first year of the loan. Property taxes on the house are \$1800 per year. Phillip estimates that he would need to upgrade his property and liability insurance to \$800 per year and would incur about \$1500 in costs the first year for maintenance. Property values are increasing at about 2.5 percent per year in the neighborhood. Alex is in the 25 percent marginal tax bracket.(a) Use Table 9-4 to calculate the monthly mortgagepayment for the mortgage loan that Phillip wouldneed.(b) How much interest would Alex pay during the firstyear of the loan?(c) Use the Run the Numbers worksheet, ?Should YouBuy or Rent?? on page 254 to determine whetherAlex would be better off buying or renting.Table 9-4Payment Period (Years)Interest Rate (%) 15 20 25 303.0 \$6.9058 \$5.5460 \$4.7421 \$4.21603.5 7.1488 5.7996 5.0062 4.49044.0 7.3969 6.0598 5.2783 4.77424.5 7.6499 6.3265 5.5583 5.06695.0 7.9079 6.5996 5.8459 5.36825.5 8.1708 6.8789 6.1409 5.67796.0 8.4386 7.1643 6.4430 5.99556.5 8.7111 7.4557 6.7521 6.32077.0 8.9883 7.7530 7.0678 6.65307.5 9.2701 8.0559 7.3899 6.99218.0 9.5565 8.3644 7.7182 7.3376