john has found a $120,000 home he wants to buy. He is able to pay a $14,000 down payment and make monthly payments of $800 at 9%(12) for 30 years. Is John able to afford this home? Explain how you know.
$120,000 -$14,000 =$106,000 Net amount that John can borrow.
Use the following formula to find out the amount that John can afford by summing up 30 x 12 =360 monthly payments @ 9% comp. monthly:
PV=P{[1 + R]^N - 1.[1 + R]^-N} R^-1=PV OF $1 PER PERIOD.
PV=800[1+0.09/12]^360 -1 x [1+0.09/12]^-360 x 0.09/12
PV=$99,425.49 This is the maximum amount of mortgage that John can afford @ 9% comp. monthly.
Therefore he is: $106,000 -$99,425.49 =$6,574.51 short.
John would have to be able to afford $852.90 per month in order to qualify for a $106,000 mortgage.
