Question

In: Economics

1. Sue is planning to buy a house. She has been advised by her financial planner...

1. Sue is planning to buy a house. She has been advised by her financial planner that her monthly house payment (which includes property taxes and insurance) should not exceed 30% of her take-home pay. Currently, her take-home pay is $2000 per month. Her monthly property taxes will be approximately $100 and her monthly homeowners insurance will be approximately $50. If Sue’s take-home pay is $2000 per month, and the mortgage is at 0.5% per month for 30 years, what is the maximum amount she can borrow to buy her house?

2. Gary and Ann have just purchased a new home. They paid $40,000 as a down payment and obtained a $200,000 mortgage to pay for the rest. The 30-year mortgage has an interest rate of 0.5% per month. How much will they pay each month in principal and interest? Your answer must be correct to the nearest penny.

Solutions

Expert Solution

Ans 1)

Monthly Income of Sue is $2000 and she should not exceed more than 30% for her monthly house payments

therefore she should not be paying more than 2000*0.3=600

Now she would be paying 100 for proerty tax , 50 for homeowners insurance then she is left with $450 sso that is her ideal EMI as exceeding is not allowed beyond $450

hence with the given EMI of 450 , r=0.5% and T=30*12=360 months

450/(1.005)+...+450/(1.005)^360=450*166.67=75000

Hence she can afford to buy a house worth $75,000 for given terms

Ans 2)

Let the EMI be X

Then using present value criterion we have

X(1/(1.005)+(1/1.005)^2+...(1/1.005)^360)=160000

Now from part 1 we know

(1/1.005)+(1/1.095^2)+...+(1/1.005)^360=166.67

X*166.67=160000

X=160000/166.67=959.988

Hence the EMI is $959.988 per month interest to be paid 160000*0.5%=800 and principal=159.98 interests component decreases month over month and principal component increases month over month.


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