4. Your sister is considering the purchase of a home rather than revewing the le

Question

4. Your sister is considering the purchase of a home rather than revewing the lease on her two-bedroom apartment. She is currently paying $850 per month for rent. She has asked you to help her decide what sort of home she might be able to afford if she wants to keep her living expenses the same. Her bank offers first-time home buyers (with good credit) a 30 year mortgage at a fixed rate of 5.49%. The cost of insurance and property taxes is about $175 per month in the neighborhood where she'd like to live.

a) what montly payment can she afford?

b) Use excel's PV function to determine what the most expensive mortgage she can afford would be?

Explanation / Answer

Monthly payment for rent = $850
Taxes and insurance = $175
Net payment = $850-$175 = $675
Discount rate = 5.49%
By using Excel's PV formula,
formula = PV(rate,nper,pmt,fv,type)
Here PV = Present value
nper = number of payments
pmt = payment
fv = future value
type = payment type
We can take fv and type are optionals so ignore them
By using this formula in excel we can get the value of PV is,
=PV(5.49,360,675)
= $12,295.08
The value of the house that she can afford with 360 (30 years) amortizations of $675
with discount rate of 5.49 is = $12,295.08

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