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A lakefront house in Kingston, Ontario, is for sale with an asking price of $457,700. The...

A lakefront house in Kingston, Ontario, is for sale with an asking price of $457,700. The real estate market has been quite active, so the house will almost certainly attract several offers, and may sell for more than the asking price. Charlie is very eager to purchase this house, but is concerned that he may not be able to afford it. He has $126,000 available for a down payment, and can pay up to $1,790 per month on a mortgage loan. As Charlie is a long-time customer, his bank has offered him a great mortgage rate of 4.1 percent on a one-year term. If the loan will be amortized over 25 years.

What is the most that Charlie can afford to pay for the house?
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Answer #1

The most that Charlie can afford for the house = down payment + present value of monthly payments he can afford

The present value of monthly payments is found using present value of annuity equation

Present value of monthly payments = 12x 25 0.041 $1790 x 1+ - 1 12 12x25 0.041 0.041 X1 + 12 12 0.022)

Present value of monthly payments =  $ 335,599.41  

The most that Charlie can afford for the house = $ 126,000 + $ 335,599.41 =  $ 461,599.41

The asking price is $457,700 and hence it can be concluded that he can afford the house.

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