Buying a House 2) After you\'ve been working five years, you decide to buy a hou
ID: 2714546 • Letter: B
Question
Buying a House
2) After you've been working five years, you decide to buy a house. As a rule of thumb, your house payments should not exceed 25% of your gross pay. Based on your annual salary during your sixth year on the job $42, 543, what is the maximum amount you could afford in the house payments per year?
3) Calculate the maximum house payment you could afford per month?
4) Assume you will qualify for an 8%, 30-year conventional mortgage. How much could you borrow based on the maximum monthly payment you can afford? (8% compounded monthly)
5) Lenders often expect that you have 20% of the value of the house as a down payment. Assume that you will be able to make a 20% down payment. What is a total cost of the house you could afford? The total cost is equal to the mortgage plus the down payment. (HINT: Use algebra. You want to calculate 20% of the value of the house, not 20% of the amount you are financing.)
6)What is the amount you would pay for for this house over the 30-year mortgage with monthly payments? Don't forget to include the down paument. (In the words, how much total cash will you be paying for this house - not taking into account the time value of money?)
7) How large would your monthly payments be if you could qualify for a 2-year mortgage at 8% compounded monthly (for the same amount you could borrow based on your calculations in question 4)?
Explanation / Answer
2) After you've been working five years, you decide to buy a house. As a rule of thumb, your house payments should not exceed 25% of your gross pay. Based on your annual salary during your sixth year on the job $42, 543, what is the maximum amount you could afford in the house payments per year?
Maximum amount you could afford in the house payments per year = 42543*25%
Maximum amount you could afford in the house payments per year = $ 10,635.75
3) Calculate the maximum house payment you could afford per month?
Maximum house payment you could afford per month = Maximum amount you could afford in the house payments per year /12
Maximum house payment you could afford per month = 10635.75/12
Maximum house payment you could afford per month = $ 886.3125
4) Assume you will qualify for an 8%, 30-year conventional mortgage. How much could you borrow based on the maximum monthly payment you can afford? (8% compounded monthly)
You Could Borrow = MonthlyPayment*(1-(1+r)^-n)/r
You Could Borrow = 886.3125*(1-(1+(8%/12))^-(12*30))/(8%/12)
You Could Borrow = $ 120,789.76
5) Lenders often expect that you have 20% of the value of the house as a down payment. Assume that you will be able to make a 20% down payment. What is a total cost of the house you could afford? The total cost is equal to the mortgage plus the down payment. (HINT: Use algebra. You want to calculate 20% of the value of the house, not 20% of the amount you are financing.)
The total cost = Borrowed Amount + Down payment
The total cost = Borrowed Amount + 20/80 * Borrowed Amount
The total cost = 120789.76 + 20/80 *120789.76
The total cost = 120789.76 + 30197.44
The total cost = $ 150,987.20
6)What is the amount you would pay for for this house over the 30-year mortgage with monthly payments? Don't forget to include the down paument. (In the words, how much total cash will you be paying for this house - not taking into account the time value of money?)
Amount you would pay for for this house over the 30-year mortgage = Down Payment + monthly payment*no of payment
Amount you would pay for for this house over the 30-year mortgage = 30197.44 + 886.3125*(30*12)
Amount you would pay for for this house over the 30-year mortgage = $ 349,269.94
7) How large would your monthly payments be if you could qualify for a 2-year mortgage at 8% compounded monthly (for the same amount you could borrow based on your calculations in question 4)?
Monthly payment would be = Loan amount / ((1-(1+r)^-n)/r)
Monthly payment would be = 120789.76/((1-(1+(8%/12))^-(12*2))/(8%/12))
Monthly payment would be = $ 5462.99
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