Question

Y ou are 35 years old You have a non-working spouse (same age) You have one child, age 3 Annual gross income S110,000 Your monthly expenses total S3,500 Monthly debt payments are S400 (counted in the S3,500) Tax-specific Information Adjusted gross income- S75,500 Itemized deductions-$15,500 Child care tax credit = $500 Federal income tax withheld S6,250 Amount for personal exemptions- S12,500 The kids are getting too big for your apartment, so it's time to buy a house! Your bank is offering a traditional 30-year mortgage at 6%. You intend to put 10% down (which is feasible because you've been saving for the last five years), and you figure property taxes and insurance will amount to S200/month a) What is an affordable mortgage payment for your situation? b) What is an affordable mortgage amount for your situation? c) What is an affordable purchase price for your situation?

Answer 1

As out of three which questions was to be answered is not mentioned, as per the policy we have to answer only the first question. So will be answering the first part on “what is an affordable mortgage payment for your situation?”

The question deals with laying out the budget of the household and finding the free cash available at the end of the period which would help to make the decision regarding mortgage.

Annual income = $110,000

Monthly exp = $3,500 so annual expenses = $42,000 ($3,500 x 12)

Monthly debt of $400 is already counted in $3,500

Tax = $5,692.5 (Refer calculation at the end)

Proposed increase on monthly spend due to taxes & insurance = $200 per month ($2,400 per annum)

On assumption that the saving will be stable in future, i.e. not considering the effect of change in inflation and change in salary, and loan is interest and principal monthly instalment type, the calculation goes as follow,

Net free cash for the year = $110,000 - $42,000 - $5692.5 - $2,400 = $59,907.5

Monthly free cash flow would be = $59,907.5 / 12 = $4,992.25 ~ $4,990 (Rounding off)

Hence, the affordable mortgage payment would be $4,990

So monthly available free cash is of $4,990, hence the maximum/affordable amount of loan would be the amount where EMI would be $4,990 for 30 years and at 6%.

By reverse calculation it would come to, $832,292.

So, affordable loan amount is $832,292

Purchase price, the down payment/upfront payment was 10% hence the person will take loan for rest of 90%. The answer of b i.e. affordable amount of loan is $832,292.

Hence the loan amount $832,292 is 90% of purchase price,

So, purchase price is $832,292 / 90% = $924,768.89 ~ $924,769 (rounding off)

Purchase price is $924,769

Calculation of tax –

As to calculate the exact tax, we would some more details about the person, but since the question does not deal with the same, we would make some assumptions,

1. Itemized deductions is claimed instead of standard deductions.

2. Person qualifies all condition to claim Child care tax credit

3. Filing return as married jointly

Gross income = $75,500

Itemized deduction = $15,500

Child care tax credit = $500

Federal income tax withheld = $6,250

Amount for personal exemption = $12,500

Net income = $47,500 ($75,500 – $15,500 – $12,500)

As per the tax slab, tax would be,

= $1,865 + (($47,500-$18,650) x 15%)

= $1,865 + ($28,850 x 15%)

= $1,865 + $4327.5

= $6,192.5

Post child care deduction, tax would be $5,692.5 ($6,192.5 - $500)