Question

Sam has an annual income of $78,000 and wants to buy a home.
He will need a home mortgage loan to do that. Current mortgage interest rates are 6%
for a 30 year loan. Given the type of home he would like to buy, annual real estate
taxes and homeowner’s insurance would be about $4,800 and $1,500, respectively.
Given the above facts, and using a 36 percent back-end ratio,
what total monthly mortgage loan payments (including taxes and insurance, i.e.,
PITI) could Sam afford if his monthly car loan payment, student loan payment and
credit card payment were $470, $350 and $250, respectively?

Answer 1

Annual income = 78000

Back end ratio = 36%

Back end ratio = Annual Debt expense / Annual Income

36% = Annual Debt expense / 78000

Annual Debt expense = 36% x 78000 = 28080

Monthly debt expense = 28080 / 12 = 2340

Monthly car loan = 470,Monthly student loan = 350 and Monthly credit card payment = 250

Annual real estate taxes =4800

Monthly real estate taxes = 4800 /12 = 400,

Annual homeowner's insurance = 1500

Monthly homeowner's insurance = 1500/12 = 125

Total mortgage payment excluding taxes and insurance = Total monthly debt expense - (Monthly real estate taxes + Monthly homeowner's insurance + Monthly car loan + Monthly student loan + Monthly credit card payment) = 2340 - (400 + 125 + 470 + 350 + 250)

=2340 - 1595 = 745

Monthly mortgage payment including taxes and insurance = Total mortgage payment excluding taxes and insurance + taxes + insurance = 745 + 400 + 125 = 1270

Hence total mortgage payment including taxes and insurance that can be affordedds = 1270