Question

Michelle Duncan wants to know her affordable home purchase price. Her annual gross income is $49,800. She has $820 per month of other debt and expects her property taxes and homeowners insurance to cost $270 per month. She knows she can get a 8.50%, 30-year mortgage so that her mortgage payment factor is $7.69. She expects to make a 25% down payment. What is Michelle's affordable home purchase price? (Round your answer to the nearest dollar amount.)
a) $21,110
b) $253,316
c) $63,329
d) $84,439
e) $48,710

Answer 1

Answer:

d) $84,439

Explanation:

We can use the rule of 28/36 to calculate Michelle's affordable home purchase. She should only spend up to 28% of her monthly income on housing expenses and up to 36% of her monthly income paying for debt service.

monthly salary = $49,800 / 12 = $4,150

her total monthly amount to pay for debt service = $4,150 x 36% = $1,494

she is already paying $820 per month for other debts, so her monthly payment should be less than: $1,494 - $820 = $674

her total monthly amount to pay for housing expense = $4,150 x 28% = $1,162

she is planning on paying $270 in related house expenses, so her monthly payment should be less than: $1,162 - $270 = $892

out of the five options, Michelle cannot afford to buy the $253,316 house, but she can afford to buy the $84,439 house.

[($21,110 x 0.75) / $1,000] x 7.69 = $121.75 monthly payment

[($253,316 x 0.75) / $1,000] x 7.69 = $1,461 monthly payment

[($63,329 x 0.75) / $1,000] x 7.69 = $365.25 monthly payment

[($84,439 x 0.75) / $1,000] x 7.69 = $487 monthly payment

[($48,710 x 0.75) / $1,000] x 7.69 = $280.93 monthly payment