In: Finance
Suppose you take out a 20-year mortgage for a house that costs $462,293. Assume the following: The annual interest rate on the mortgage is 4%. The bank requires a minimum down payment of 18% at the time of the loan. The annual property tax is 1.7% of the cost of the house. The annual homeowner's insurance is 0.7% of the cost of the house. The monthly PMI is $99 Your other long-term debts require payments of $730 per month. If you make the minimum down payment, what is the minimum gross monthly salary you must earn in order to satisfy the 28% rule and the 36% rule simultaneously?
Answer:
Let us first calculate the monthly mortgage payment:
Loan amount = Cost of house - down payment = $462293 - 462293 * 18% = $379080.26
Monthly interest = 4%/12
Number of months = 20 * 12 = 240
Monthly payment = PMT (rate, nper, pv, fv, type) = PMT (4%/12, 240, -379080.26, 0, 0) = $2,297.152
Minimum gross monthly salary to satisfy 28% rule:
Monthly property tax = 462293 *1.7%/12
Monthly home owners insurance premium = 462293 *0.7%/12
Monthly PMI = $99
Hence:
Minimum gross monthly salary required to satisfy 28% rule = (2297.152 + 462293 *1.7%/12 + 462293 *0.7%/12 + 99) / 28% = $11,859.78
Minimum gross monthly salary to satisfy 36% rule:
Given:
Other long-term debts require payments = $730 per month.
Hence:
Minimum gross monthly salary required to satisfy 36% rule
= (2297.152 + 462293 *1.7%/12 + 462293 *0.7%/12 + 99 + 730) / 36%
= $11,252.05
Higher of these two minimum gross monthly requirements based on 28% and 36% rule = $11,859.78
Minimum gross monthly salary you must earn in order to satisfy the 28% rule and the 36% rule simultaneously = $11,859.78