Brandon has currently been renting an apartment and has decided to purchase his

Question

Brandon has currently been renting an apartment and has decided to purchase his first home After discussing with a financial advisor he has found out that he can only afford a $1, 200 or less monthly mortgage payment Brandon has found a home for $250,000 He has been approved for an FHA 30 year mortgage from Wells Fargo, with monthly payments at 9.5%. 1) Can Brandon afford the home? 2) How much interest will Brandon pay over the 30 years? Use the following formula to answer the question: P = r *M/1 - (1 + r/n)^-n*t/n Let P = the payment, r = the annual rate (as a decimal), M = the mortgage amount, t = the number of years, and n = the number of payments per year.

Explanation / Answer

To determine whether Brandon can afford the home, we shall use the given formula. Here, M = $ 250000, r = 9.5/100 = 0.095, n = 12 , t = 30 so that r*M/ [ 1-(1 +r/n)-nt ] = 0.095*250000/ [ 1 –(1+0.095/12)-12*30 ] = 23750/[ 1 -(1 .007916667)-360] = 23750/[ 1 -0.058497109] = 23750/0.94150289 = 25225.62623. Then P = 25225.62623/12 = $ 2102.14 ( onrounding off to the nearest cent). Thus, the monthly instalment required to be paid by Brandon for a $ 250000 mortgage loan at 9.5 % for 30 years is $ 2102.14. However, since Brandon can afford to pay only a sum of $ 1200 or less per month, he cannot afford the home.

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