Question

Rami and Sara Sayed are young married professionals. They have been renting a two-bedroom apartment in a major metropolitan area for the last two years. Their landlord has recently informed them that he will be increasing their rent to $1,500 per month for the coming year. Although they consider this amount an affordable housing expense, Rami and Sara are seriously thinking about buying a home instead of continuing to rent. They have collected the following information to use in making their decision:

Combined gross income: $6,000 per month
After-tax income:               $5,000 per month
Car loan payments:            $550 per month
Credit card payments:       $150 per month
Student loan payments:    $230 per month
Available down payment: $20,000

Expected closing costs $3,000

30-year fixed mortgage rate: 6 percent, 0 points
Estimated property tax:    $1,800 per year
Estimated homeowner’s ins: $600 per year
Estimated maintenance costs: $150 per month
Additional utilities:            $60 per month

Assuming that the Sayeds do not want to spend more than $1,500 per month on total housing expenses, calculate the maximum price that they can afford to pay for a home . *hint: don't forget to add your downpayment to the maximum loan amount! Round up to the nearest whole dollar. See "Calculating an Affordable Home Price" in the text for assistance.

Answer 1

The Sayed's can pay a maximum price of $ 6,27,457 for a house.

The detailed calculation is below:

1 Calculating Affordable Home Price 2 3 p.m. = per month 5 Particulars Amount 6 7 Combined Gross Income $6,000.00 p.m. 8 Taxes -$1,000.00 p.m. 9 Net Gross Income (A) $5,000.00 p.m. 10 11 Fixed Expenses 12 Car Loan $550.00 p.m. 13 Credit Card $150.00 p.m. 14 Student Loan $230.00 p.m. 15 Total Fixed Expenses (B) $930.00 16 17 Income Available for Housing p.m. (C) $4,070.00 p.m. 18 19 Expenses w.r.t House 20 Property Taxes $150.00 p.m. 21 (1800/12) 22 Insurance $50.00 p.m. 23 (600/12) 24 Maintenace $150.00 p.m. 25 Utilities $60.00 p.m. 26 Total Expenses w.r.t House (D) $410.00 p.m. 27 28 Amount available for Principal & Interest (C-D) $3,660.00 p.m.

29 30 Step 2: Calculation of Affordable Mortgage Cost 31 32 Fixed Mortgage Rate 33 Mortgage Period in Months 34 Amount available for Principal & Interest 6.00% 360.00 $3,660.00 35 $6,10,457.31 36 Maximum Affordable Mortgage Amount 37 (=PV(0.005,360,3660)) 38 0.005=0.06/12 39 40 Down Payment 41 Closing Cost $20,000.00 $3,000.00 42 $6,27,457.31 43 Maximum House you can Afford 44