Question

A young married couple has carefully looked at their budget. After review, they can afford a monthly mortgage payment of $1,007.00. They go to their local banker and she offers them a mortgage of 5.16% APR with monthly compounding with a term of 30 years. The couple has enough savings to pay 20% down, so the mortgage will be 80% of the home’s value.

With this mortgage and a 20% down payment, what priced house can the couple afford?

Answer 1

Monthly Payment couples can afford = $1007.00

Calculating the Present Value of these monthly payments paid over 30 years using PV of ordinary annuity formula:-

Where, C= Periodic Payments = $1007

r = Periodic Interest rate = 5.16%/12 = 0.43%

n= no of periods = 30 years*12 = 360

Present value = $184,215.46

So, the loan amount you can pay is $184,215.46

Down-Payment = 20%

Price of House = Loan amount/(1-Down-Payment)

Price of House = $184,215.46/(1-0.20)

Price of Housecouple can afford = $230,269.33