Jane and Ron have combined annual gross earnings of $31,850. What is the
maximum amount they should consider spending for the purchase of a
house?
a. $79,625
b. $53,000
c. $31,850
d. $63,700
As a general rule, financial experts recommend that individuals spend no more than 28% of their gross monthly income on housing expenses. To apply this rule to Jane and Ron's combined earnings, we first need to calculate their gross monthly income:
$31,850 / 12 months = $2,654.17 per month
Then, we multiply this amount by 0.28 to find the maximum amount they should spend on housing expenses:
$2,654.17 x 0.28 = $743.58 per month
To determine the maximum amount they should consider spending on a house, we can use this monthly amount to calculate an estimated mortgage payment. Assuming a 30-year fixed-rate mortgage at 4% interest, with a 10% down payment, the maximum amount they should consider spending on a house is:
$743.58 / 0.00316 = $235,126.58
However, this amount assumes that Jane and Ron have no other debt or financial obligations. If they have significant student loans, credit card debt, or other expenses, they may need to adjust their budget accordingly. Therefore, the best answer is not given, but option b, $53,000 is far below what they can spend given their combined earnings.