In: Accounting
If a family's gross annual income is $57,000, use appropriate computations to determine whether the family can afford a $180,000 20-year fixed-rate mortgage at 4 4%. Choose the correct answer below.
A.
The family can afford the mortgage because the monthly payment is
greater than what they should pay each month.
B.
The family can afford the mortgage because the monthly payment is less than what they should pay each month.
C.
The family cannot afford the mortgage because the monthly payment is less than what they should pay each month.
D.
The family cannot afford the mortgage because the monthly payment is greater than what they should pay each month.
Correct answer is B.
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Interest rate = 4.4/12 = .36667% per month
Loan term = 20*12 = 240 months
If the loan amount is P, rate on interest (monthly is r, and loan term is n the EMI will be
EMI= P*r[(1 +r)^n]/ [(1+ r)^n- 1]
= 180000*0.0036667[(1 +0.0036667)^240]/ [(1+ 0.0036667)^240- 1]
= 660.006[(1.0036667)^240]/ [(1.0036667)^240- 1]
= 660.006[2.41]/ [2.4070419099167- 1]
= 660.006[2.41]/ [1.4070419099167]
= 660.006[1.71281323108753]
= 1130.467
So EMI will be $1130.467
Income per month = 57000/12 = $4750
% of income that will go in EMI = 1130.467/4750 = 23.8
Debt ratio of 24% is considered feasible, so family can consider buying home.
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Hope this answer your query.
Feel free to comment if you need further assistance. J