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Chapter 8: Problem 20

Describe how to determine what you can afford for your monthly mortgage payment.

Short Answer

Expert verified
To calculate the affordable monthly mortgage payment, determine your Gross Monthly Income, calculate your Monthly Debts, compute your 28% Housing Expense Ratio and 36% Debt-to-Income Ratio then subtract the Monthly Debts from the Debt-to-Income Ratio. This gives the affordable monthly mortgage payment.

Step by step solution

01

Determine your Gross Monthly Income

Gross Monthly Income is your total earnings or revenue before any deductions such as taxes, social security, and retirement contributions. This can be obtained by dividing your annual salary by 12. For example, if your annual salary is \$60,000, your Gross Monthly Income would be \$5000.
02

Calculate your Monthly Debts and Obligations

These are all the mandatory payments you have to pay every month. This include but not limited to car loan payments, student loans, credit card bills, etc. Pull out your monthly bills and calculate the total.
03

Determine your Housing Expense Ratio

The housing expense ratio, typically should not exceed 28% of your gross monthly income. This includes not just your potential mortgage, but also home insurance, property taxes, and if applicable, homeowners association fees. To calculate, multiply your gross monthly income by 0.28.
04

Determine your Debt-to-Income Ratio

Debt-to-income ratio, typically should not exceed 36% of your gross monthly income. This ratio includes all of your monthly debts (from step 2) not only your housing expenses. To calculate, multiply your gross monthly income by 0.36. The result should be greater than the sum of your monthly debts and your calculated monthly mortgage payment.
05

Calculate manageable monthly mortgage payment

Subtract your monthly debts from the result obtained in Step 4 (Debt-to-Income Ratio). This gives you an idea of how much you can afford to put towards a mortgage every month.

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Most popular questions from this chapter

In terms of paying less in interest, which is more economical for a $$ 150,000\( mortgage: a 30 -year fixed-rate at \)8 \%\( or a 20 -year fixed-rate at \)7.5 \%$ ? How much is saved in interest?

Exercises 3-4 involve credit cards that calculate interest using the average daily balance method. The monthly interest rate is \(1.2 \%\) of the average daily balance. Each exercise shows transactions that occurred during the June 1-June 30 billing period. In each exercise, a. Find the average daily balance for the billing period. Round to the nearest cent. b. Find the interest to be paid on July 1 , the next billing date. Round to the nearest cent. c. Find the balance due on July 1 . d. This credit card requires a \(\$ 30\) minimum monthly payment if the balance due at the end of the billing period is less than \(\$ 400\). Otherwise, the minimum monthly payment is \(\frac{1}{25}\) of the balance due at the end of the billing period, rounded up to the nearest whole dollar. What is the minimum monthly payment due by July 9? $$ \begin{array}{|l|c|} \hline \text { Transaction Description } & \text { Transaction Amount } \\ \hline \text { Previous balance, } \$ 4037.93 & \\ \hline \text { June } 1 \quad \text { Billing date } & \\ \hline \text { June } 5 \quad \text { Payment } & \$ 350.00 \text { credit } \\\ \hline \text { June } 10 \text { Charge: Gas } & \$ 31.17 \\ \hline \text { June } 15 \text { Charge: Prescriptions } & \$ 42.50 \\ \hline \text { June } 22 \text { Charge: Gas } & \$ 43.86 \\ \hline \text { Charge: Groceries } & \$ 112.91 \\ \hline \text { June } 29 \text { Charge: Clothing } & \$ 96.73 \\ \hline \text { June } 30 \text { End of billing period } & \\ \hline \text { Payment Due Date: July } 9 & \\ \hline \end{array} $$

How is the amount of a mortgage determined?

The price of a condominium is \(\$ 180,000\). The bank requires a \(5 \%\) down payment and one point at the time of closing. The cost of the condominium is financed with a 30 -year fixed-rate mortgage at \(8 \%\). a. Find the required down payment. b. Find the amount of the mortgage. c. How much must be paid for the one point at closing? d. Find the monthly payment (excluding escrowed taxes and insurance). e. Find the total cost of interest over 30 years.

In Exercises 11-18, a. Determine the periodic deposit. Round up to the nearest dollar. b. How much of the financial goal comes from deposits and how much comes from interest? $$ \begin{array}{|l|l|l|l|} \hline \$ \text { ? at the end of each month } & 7.25 \% \text { compounded monthly } & 40 \text { years } & \$ 1,000,000 \\ \hline \end{array} $$
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