Suppose your gross monthly income is $5,400 and your current monthly payments are $425. If the...

Suppose your gross monthly income is $5,400 and your current monthly payments are $425. If the bank will allow you to pay up to 36% of gross monthly income (less current monthly payments) for a monthly house payment, what is the maximum loan you can obtain if the rate for a 30-year mortgage is 4.65%? (Round your answer to the nearest cent.)

Expert Solution

Monthly income	$ 5,400
Monthly payments	$ 425
Net	$ 4,975
Maximum installment allowed	36%
Maximum installment allowed	4975*36%
Maximum installment allowed	$ 1,791.00

Maximum loan will be the present value of all installments

PV of annuity for making pthly payment

P = PMT x (((1-(1 + r) ^- n)) / i)
Where:
P = the present value of an annuity stream	To be computed
PMT = the dollar amount of each annuity payment	$ 1,791.00
r = the effective interest rate (also known as the discount rate)	4.75%	((1+4.65%/12)^12)-1)
i=nominal Interest rate	4.65%
n = the number of periods in which payments will be made	30	Years


Maximum loan amount=	PMT x (((1-(1 + r) ^- n)) / i)
Maximum loan amount=	1791* (((1-(1 + 4.75%) ^- 30)) / 4.65%)
Maximum loan amount=	$28,944.79

jeff jeffy answered 1 year ago

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