2. Mortgage Aff ordability. Seth and Cassie Moore of Holyoke, Massachusetts, have an annual income of

$120,000 and want to buy a home. Currently, mortgage rates are 7 percent. The Moores want to take out a mortgage for 30 years. Real estate taxes are estimated to be $4800 per year for homes similar to what they would like to buy, and homeowner’s insurance would be about

$720 per year.

(a) Using a 28 percent front-end ratio, what are the total annual and monthly expenditures for which they would qualify?

(b) Using a 36 percent back-end ratio, what monthly mortgage payment (including taxes and insurance)

could they aff ord given that they have an automobile loan payment of $470, a student loan payment of

$350, and credit card payments of $250? (Hint: Subtract these amounts from the total monthly aff ordable payments for their income to determine the amount left over to spend on a mortgage.)

(c) If mortgage interest rates are around 7 percent and the Moores want a 30-year mortgage, use the information in the Did You Know box on page 259 to estimate how much they could borrow given your answer to part

b. (Hint: Subtract the monthly real estate taxes and homeowner’s insurance from your part b answer fi rst.)