Stephen said that the ratio of his mortgage to the sales price of his house is 7 to 6. Is this reasonable? Explain your answer.
I said yes it is reasonable. Stephen would pay 7 dollars for every 6 he borrowed. We don't know the sales price or how long the mortgage is and we can only go with the information given. Is this right?
A mortgage does not include the interest. With that ratio, Stephen would have a $70,000 mortgage for a $60,000 house. Does that sound reasonable to you?
Yes, your explanation is correct. Based on the information provided, Stephen's mortgage-to-sales price ratio is 7 to 6. This means that for every 7 dollars that Stephen borrows for his mortgage, the sales price of his house is 6 times that amount.
To determine if this ratio is reasonable, we need to compare it to common industry standards and financial guidelines. Mortgage lenders typically consider the loan-to-value (LTV) ratio to assess the loan's risk. The LTV ratio is the loan amount divided by the appraised value or sales price of the property.
In this case, we only have the mortgage-to-sales price ratio. To convert this to an LTV ratio, we need to calculate the loan amount as a fraction of the sales price.
Let's assume the sales price is "x" dollars. According to the given ratio, Stephen would borrow 7/6 of that amount. To calculate the loan amount, we multiply the sales price by the fraction:
Loan amount = (7/6) x
To find the LTV ratio, we divide the loan amount by the sales price:
LTV ratio = [(7/6) x] / x = 7/6
Comparing this LTV ratio of 7/6 to industry standards, it is within a typical range. In general, lenders prefer lower LTV ratios, typically around 80% (0.8) or lower. Stephen's LTV ratio of 7/6 (approximately 1.167) falls within a reasonable range.
However, it's important to note that other factors, such as Stephen's financial situation, creditworthiness, and the overall housing market, can also affect the reasonableness of this mortgage-to-sales price ratio. Without further information, we can only assess its reasonableness based on industry standards and assume that other relevant factors are within acceptable ranges.