Assume the following items regarding your purchase of a home: You have saved up

Question

Assume the following items regarding your purchase of a home: You have saved up $20,000 toward the purchase of your home. Your salary is $36,000 per year. The bank will lend you up to a total amount where your monthly home loan payment will equal 28% of your monthly salary. The bank is offering you a 30 year loan (360 payments) with an APR of 6%. Closing costs are expected to be 4% of the total loan amount. In light of the above factors, answer the following questions: 1. What is the maximum amount the bank will lend you? 2. If you borrow this entire amount, how much house can you buy? (Remember, closing costs are expected to be 4% of the value of the home and that you have saved $20,000 toward your home purchase.)

Explanation / Answer

Monthly Salary=$ 36000 per year and per month it is $ 3000

and the loan amount bank want to sanction is 28% of monthly salary =monthly home loan payment

and 28% of monthly salary = $ 3000*28%=$ 840

so $ 840 would be the home loan monthly payment( Loan+intrest)

no of monthly installments are 360

at APR =6%

total payments for 360 installments =360*840=$302400 (loan+intrest)

so the maximum amount =$ 140000 (by trail and error method )

if borrowed entire amount can purchase a house worth $ 160000 ($140000+$20000 (savings)

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