The Johnsons have accumulated a nest egg of $15,000 that they intend to use as a

Question

The Johnsons have accumulated a nest egg of $15,000 that they intend to use as a down payment toward the purchase of a new house. Because their present gross income has placed them in a relatively high tax bracket, they have decided to invest a minimum of $1300/month in monthly payments (to take advantage of the tax deduction) toward the purchase of their house. However, because of other financial obligations, their monthly payments should not exceed $1600. If local mortgage rates are 8.5%/year compounded monthly for a conventional 30-year mortgage, what is the price range of houses they should consider? (Round your answers to the nearest cent.)

FIND:

The least expensive $

The most expensive $

Explanation / Answer

In the first year, they will pay around $15,000 in interest. A married couple has a standard deduction of around $12,000. But, to "take advantage" of the mortgage deduction, they decide to itemize. They claim their $15,000 in interest. This means that they are actually only gaining $3,000 in deductions. Assuming a higher tax bracket of 30%, they are saving around $900 on their taxes. So, they paid $15,000 in interest and saved $900 in taxes.

So, the price range of houses they should consider is 900$.

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