Suppose you currently live with your parents but would like to purchase a house

Question

Suppose you currently live with your parents but would like to purchase a house of your own. You add up all your current monthly expenses and subtract them from your monthly net salary and discover a $1,500 surplus. You also have $40,000 in a savings account accruing interest at a 3.15% rate. You deposit your surplus of $1,500 each month for a year before purchasing a house. You apply for a 30 year mortgage and get approved for $550,000 at a 8.3% interest rate. You are unsure if you can afford a house that costs $550,000. Use the TVM Solver to determine how much of a mortgage you can afford to take out.

Savings Account TVM

N=

I%=

PV=

PMT=

FV=

P/Y=

C/Y=

PMT: END BEGIN

Mortgage TVM

N=

I%=

PV=

PMT=

FV=

P/Y=

C/Y=

PMT: END BEGIN

Savings Account TVM

N=

I%=

PV=

PMT=

FV=

P/Y=

C/Y=

PMT: END BEGIN

Mortgage TVM

N=

I%=

PV=

PMT=

FV=

P/Y=

C/Y=

PMT: END BEGIN

Explanation / Answer

The affordable mortgage is $ 258,272.72

The steps using the TVM solver are are detailed below:

1) Savings Bank:

    Enter 40,000 in PV, 1500 in PMT, 12 in N & 3.15 in %. Then click PV to get $59,540.51

2) Mortgage:

   As the savings bank will have a balance of 59,540.51 at the end of the year which he can use, he can afford a house whose value would be equal to 59,540.51 + PV of PMT of 1500 for 360 months

Now enter PMT = 1500, N = 360, % =8.3, frequency monthly, we get 198,732.21 as the PV of the monthly savings for 30 years.

So, the affordable mortgage is 198,732..21 + 59,540.51 = $ 258,272.72

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