In the spring of 2022, you and your family were looking for the house of your dreams. 

Given your household income and your expenses, you determined that you could afford to pay $1,200 for a monthly house payment.

As of February 2022, it looked like you could get a 30-year mortgage rate of 3.00%:

a) Given the above information, what is the maximum amount you could finance for your dream home? 

 

b) You got busy and didn't find the right home and now it is early 2023 and you are looking at homes again. The good news is that there are more homes available for sale, but the bad news is that mortgage rates have gone up because of inflation. Assuming that you can get a rate of 6.70% APR for a 30-year mortgage and further assuming that you can still afford to pay $1,200 per month, what is the highest amount you can now finance on a home?

BACKGROUND AND SETUP for part C: It is generally accepted that a 15% down payment is required to avoid "PMI" or private mortgage insurance. This insurance typically costs between 0.3% to 1.2% of the amount borrowed and depends on your credit score and down payment. That means your PMI would cost between $30 and $70 per month per $100,000 borrowed. Here is an example from Freddie Mac (a publicly traded, government-sponsored entity) that assumes a house purchased for $200,000. Note the differences in down payments and PMI requirements.

 

With a 15% down payment, PMI is waived.

Assumptions	5% down payment & PMI	15% down payment & no PMI
Down Payment	$10,000	$40,000
Loan Amount	$190,000	$160,000
Mortgage Type	30-year	30-year
Interest rate	4.10%	4.10%
Mortgage Payment (principal & interest only)	$918.08	$773.12
PMI, assuming 0.55%	$104.50	$0.00
Total monthly payment	$1,022.58	$773.12

Answer rating: 100% (QA)

a To determine the maximum amount you could finance for your dream home we need to use the formula f... View the full answer