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?
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To determine how the increased mortgage rates would affect the price range of houses the Johnsons should consider, we need to calculate the maximum mortgage payment they can afford each month based on their financial obligations. Here's how you can do it:
1. Start by calculating the maximum mortgage payment they can afford each month. Deduct their financial obligations from their present gross income:
Maximum mortgage payment = Present gross income - Financial obligations
Maximum mortgage payment = $3000/month - $2400/month
Maximum mortgage payment = $600/month
2. Use a mortgage calculator to determine the loan amount they can afford based on the maximum mortgage payment. Let's assume the mortgage term is 30 years with an interest rate of 8%:
Loan amount = Maximum mortgage payment / (monthly interest rate * (1 - (1 + monthly interest rate) ^ (-loan term in months)))
Loan amount = $600 / (0.08/12 * (1 - (1 + 0.08/12) ^ (-30*12)))
Loan amount ≈ $64,236.46
3. Add their nest egg of $40,000 to the loan amount to determine the maximum price range of houses they should consider:
Maximum price range = Loan amount + Nest egg
Maximum price range = $64,236.46 + $40,000
Maximum price range ≈ $104,236.46
Therefore, the Johnsons should consider houses within the price range of approximately $104,236.46 or below, given the increased mortgage rates of 8% for a 30-year mortgage.