Kyle and Sarah are planning on buying a house for $122,000. They plan on making
ID: 2636057 • Letter: K
Question
Kyle and Sarah are planning on buying a house for $122,000. They plan on making an 8% down payment. They will finance the rest with a 30 year fixed rate loan at 6.5%. The total annual property taxes are $3750 and the annual homeowners insurance premium is $750. PMI is $53.75 per month.
(a) Assuming they qualify for the loan, how much equity will they have in their house immediately after taking out the loan?
(b) Again assuming they qualify, what would their PITI be?
(c) If Jack and Diane jointly make a gross income of $72,500 do they pass the 28% test? Explain.
(d) Suppose that in addition to the information you know from solving the problem so far you know that Jack and Diane pass the 36% test. Do they qualify for the mortgage? Explain.
Explanation / Answer
a) The down payment is 8% of the loan amount.
Down payment = 8% ($122,000) = $9,760
Total equity = Cost - Down payment - Property taxes - Insurance premium - ($53.75 X 30 X 12)
= $122,000 - $9,760 - $3,750 - $750 - $19,350
= $88,390
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b) Principal amuont is $122,000, Interest amount is $19,350, Taxes is $3,750 and Insurance is $750.
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c) Yes, they pass the 28% test
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d) Yes, they qualify for the mortgage.
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