Can Abigail and Alexander Afford This Home Using the Installment Debt Loan Criterion? Next week, your friends Abigail and Alexander want to apply to the Third Universal Bank for a mortgage loan. They are considering the purchase of a home that is expected to cost $215,000. Given your knowledge of personal finance, they've asked for your help in completing the Home Affordability Worksheet that follows. (Note: When completing the form, round each dollar amount to the nearest whole dollar.) To assist in the preparation of the worksheet, Abigail and Alexander also collected the following information: Their financial records report a combined gross before tax annual income of $145,000 and current (pre mortgage) installment loan, credit card, and car loan debt of $2,115 per month. Their property taxes and homeowner's insurance policy are expected to cost $2,150 per year. Their best estimate of the interest rate on their mortgage is 7.5%, and they are interested in obtaining a 15-year loan. They have accumulated savings of $50,500 that can be used to satisfy the home's down payment and closing costs. The lender requires a minimum 20% down payment, and installment loan affordability ratios that range from a minimum of 33% to a maximum of 38%. ousing Decisions A table of monthly payments (necessary to repay a $10,000 loan) follows. Interest Rate (%) Loan Maturity 15 Year 10 Year 20 Year 25 Year 30 Year 5.0 106.0655 79.0794 65.9956 58.4590 53.6822 5.5 108.5263 81.7083 68.7887 61.4087 56.7789 6.0 111.0205 84.3857 71.6431 64.4301 59.9551 6.5 113.5480 87.1107 74.5573 67.5207 63.2068 7.0 116.1085 89.8828 77.5299 70.6779 66.5302 7.5 118.7018 92.7012 80.5593 73.8991 69.9215 8.0 121.3276 95.5652 83.6440 77.1816 73.3765 8.5 123.9857 98.4740 86.7823 80.5227 76.8913 9.0 126.6758 101.4267 89.9726 80.4623 83.9196 9.5 104.4225 87.3697 129.3976 93.2131 84.0854 96.5022 90.8701 87.7572 10.0 132.1507 107.4605 ng Decisions 1. Annual income 38% 33% 2. Monthly income 3. Existing monthly installment payments 7. Existing monthly installment payments as percentage of monthly income (%) 5. Lender's monthly installment loan affordability ratio 5. Maximum amount of total affordable installment debt 7. Maximum monthly mortgage payment (PITI) affordable based on installment loan ratio B. Estimated monthly property tax and insurance payment 9. Maximum monthly loan payment (P and I only) 10. Expected interest rate 11. Planned loan maturity (years) 12. Mortgage payment factor per $10,000 (from the Loan Maturity table) 13. Maximum loan based on mortgage payment factor (from the Loan Maturity table) 14. Required (20%) down payment 15. Maximum home price based on installment loan ratio 7.59 15
