Question

Five years have passed and Jamie Lee, 34, is considering taking the plunge--not only is she engaged to be married, but she is also deciding on whether to purchase a new home.

Jamie Lee’s cupcake café is a success! It has been open for over a year now and has earned itself rave reviews in the local press and from its regular customers who just cannot get enough of her delicious varieties of cupcakes. One such customer, who stopped by on a whim in the café’s first week of business, is Ross. After a whirlwind courtship, Ross, a self-employed web designer, proposed, and Jamie Lee agreed to be his wife.

The bungalow that Jamie Lee has been renting for the past five years is too small for the soon-to-be newlyweds, so Jamie Lee and Ross have purchased a brand new three-bedroom, 2 ½ bath home in a quiet neighborhood for $280,000.

Use the provided information and the table below to calculate the affordable mortgage amount that would be suggested by a lending institution based on Jamie Lee and Ross’s income. You will need to make note of the purchase price (above) of their home for future questions.

Use the following for Jamie Lee and Ross's calculations:

10% down payment

$400 per month for estimated combined property taxes and insurance

6% interest rate for 30 years

Refer to Exhibit 9-9 for current mortgage rates

Current Financial Situation

Assets (Jamie Lee and Ross combined): Income:

Checking account $5,000 Gross income (Jamie Lee) $52,000

Savings account $55,900 Net income after taxes (Jamie Lee) $36,400

Emergency fund savings account $19,800 Gross income (Ross) $77,000

IRA balance $24,700 Net income after taxes (Ross) $65,450

Car (Jamie Lee) $12,700 Monthly Expenses (Combined):

Car (Ross) $20,700 Utilities $135

Liabilities (Combined): Food $360

Student loan balance $0 Gas/Maintenance $310

Credit card balance $0 Credit card payment $0

Car loans $8,700 Car loan payment $296

Entertainment $335

Step 1

Determine your monthly gross income (annual gross income / 12)

Step 2

With a down payment of at least 5%, lenders use 33% of monthly gross income as a guideline for PITI (principal, interest, taxes, and insurance) and 38% of monthly gross income as a guideline for PITI plus other debt payments. Enter 33% or 38% depending upon whether other debt payments are present. x

Step 3

Subtract other debt payments (such as payments on an auto loan), if applicable. -

Subtract estimated monthly costs of property taxes and homeowner's insurance. -

Affordable monthly mortgage payment

Step 4

Divide this amount by the monthly mortgage payment per $1,000 based on the current mortgage rates (see Exhibit 9-9). For example, for a 10%, 30-year loan, the number would be $8.78). /

Multiply by $1,000 x

Affordable mortgage amount

Step 5

Divide your affordable mortgage amount by 1 minus the fractional portion of your down payment (for example, 0.9 for a 10 percent down payment). /

Affordable home purchase price

Answer 1

Current Financial Situation

Assets (Jamie Lee and Ross combined):	Amount	Income:	Amount
Checking account	$5,000	Gross income (Jamie Lee)	$52,000
Savings account	55,900	Net income after taxes (Jamie Lee)	$36,400
Emergency fund savings account	19,800	Gross income (Ross)	$77,000
IRA balance	24,700	Net income after taxes (Ross)	$65,450
Car(Jamie lee)	12,700	Monthly Expenses (Combined):
Car(Ross)	20,700	Utilities	$135
Liabilities(Combined)		Food	$360
Student loan balance	0	Gas Maintenace	$310
Credit card balance	0	Credit card payment	0
Car loans	8700	Car loan payment	$296
		Entertainment	$335

1)Determination of  monthly gross income= (Gross income /12) = (52,000+77,000)/12= $10,750

2)Since other debt are present ,38% will be choosen

3)Subtract other debt payments (such as payments on an auto loan), if applicable. - $296

Subtract estimated monthly costs of property taxes and homeowner's insurance. $400 per month for estimated combined property taxes and insurance

Affordable monthly mortgage payment- ( $10,750*38%)= $(4,085-296-400)= $3389

4)Given 6% interest rate for 30 years, the number would be = 13.76

So divide ($43389/13.76) =$246.29

So Affordable mortagage amount = $(1000* $ 246.29)= $246,290

5)Given down payment=10%

So, (10%-1)=9%

Affordable home purchase price= ($24629/0.9) = $2,73,655

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