You and your spouse have decided it is time to purchase a ho

You and your spouse have decided it is time to purchase a home. You have a total of $11,974 that you can use for a down payment and closing costs. Since you will not be paying rent, you will have $1,176 in your budget to pay a mortgage. Your agent tells you that total closing costs will be $2,000. Your monthly escrow for taxes and insurance will be $150 in addition to your mortgage payment. You will qualify for a 30 year mortgage at 5.5%. What is the maximum you can pay for your new home?

Solution

We need to calculate the present value of the monthly payment for 30 years

Monthly payment = 1176- 150( escrow for taxes and insurance) = 1026

Interest = 5.5 % , interval is monthly and n= 30 years

Present value of annuity = $ 180700.93 (using a calculator)

To this add the amount left after deducting closing costs

11974-2000= 9974

Total amount he can pay for a new home = 180700.93 + 9974 = $ 190674.93