A professional engineer is trying to purchase their first home. Consider a situation where 70% of their $75K annual salary is considered disposable income (after taxes/health insurance and such). In attempting to get pre-approval for a loan, the banker has indicated that 35% is the maximum amount of their disposable income that can go towards the monthly mortgage payment. The quoted rate for a 30-year mortgage is currently 6.24% (compounded monthly) and the engineer has saved $20K for the down payment. What is the maximum purchase price of a home they can afford? Carefully use months for the time period.
Added by Colin G.
Step 1
Disposable income per month = 70% of $75,000 / 12 months Disposable income per month = $52,500 * 0.70 / 12 Disposable income per month = $36,750 / 12 Disposable income per month = $3,062.50 Show more…
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You are ready to purchase your first house. You saved up $25,000 for a down payment. You also performed a cash flow analysis and have determined that you can afford a monthly mortgage payment of $2,000. Suppose that you found a bank that offers a 30-year mortgage and charges an annual interest rate of 4.83%, compounded monthly. Given that you plan on making monthly payments of $2,000, how much money can you borrow? Using your answer in part a), determine the amount of interest that you will pay. Using your answer in part a), how much house can you afford? In other words, what is the maximum amount that you can pay for a house?
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