Question

You have budgeted $1800 per month for a house payment, once again ignoring taxes, insurance, and any possible mortgage insurance. If you could have bought last year, the interest rate on a 30 year mortgage would have been about 3.5%. How much could you have borrowed on your budget last year? If you have to wait another year, and if interest rates rise to 5.50% in the meantime, how much will you be able to borrow in one year?

Solve using a financial calculator

Answer 1

According the question, it is deduced that EMI of $1800 can be paid each month at 3.5% per annum for 30 years.

So, the amount that could have been borrowed last last would be the Present value of the $1800 monthly payments with interest rate of 3.5%/12 i.e. 0.29%, and total payments of 30*12 i.e. 360.

So via financial calculator HP 10BII, following the steps below -

1. Input 1,800 and press the FV key.
2. Input 360 and press the N key.
3. Input 0.29% and press the I/YR key.
4. Input 0 and press the PMT key.
5. Press the PV key

We get, PV = $4,00,850.97 i.e. Roughly $4,00,850 could have been borrowed last year

Similarly, when interest rate increases to 5.5% next year, the PV with interest rate of 5.5%/12 i.e. 0.46% comes out to be $3,17,019.17

So, roughly $3,17,019 could be borrowed in a year