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Johnsons accumulated a nest egg of $40,000 to use as down payment toward a new home. Present gross income has them in high tax bracket, decided to invest min $2400/month in payments (for tax break). Financial obligations cannot exceed $3000/month. If local mortgage rates were increased to 8% for 30-year mortgage, how would this affect the price range of houses that the Johnsons should consider?

  • Math -

    so we want the present value of 360 payments of 2400
    at i = .08/12 = .006666... (I stored in calculator memory for more accuracy)

    PV = 2400(1 - 1.006666..^-360)/.006666...
    = 3270840.41

    So with a downpayment of 40000 and a payment of 2400 Johnson could consider a house around
    367 000 dollars ..... (367080.42)

    If you want to know his limit with a payment of 3000 per month, repeat the above, simply replacing the 2400 with 3000 in the calculation, then adding 40000

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