Calculating the Maximum Amount Your Client Can Afford to Pay for a House
Question:
What is the maximum amount your client can afford to pay for the house, given their annual income, savings, loan terms, and closing costs?
Answer:
The maximum amount your client can afford to pay for the house depends on several factors, including their annual income, savings, loan terms, and closing costs. By following a series of calculations, we can determine the maximum amount they can afford.
Calculating Maximum House Purchase Price:
1. Annual Income: The client's annual income is $512,000.
2. Savings: The client has saved $530,000 for the house purchase after covering closing costs.
3. Closing Costs: Closing costs will be 5% of the loan amount.
4. Loan Terms: The local bank offers a 30-year fixed-rate mortgage at an annual interest rate of 6.9%.
5. Monthly Payments Rule: The bank does not approve loans with monthly payments exceeding 28 times the client's monthly income.
Steps to Calculate Maximum House Purchase Price:
Step 1: Calculate the maximum monthly income available for mortgage payments:
Monthly income = Annual income / 12
Monthly income = $512,000 / 12
Monthly income = $42,666.67
Step 2: Determine the maximum monthly mortgage payment allowed:
Maximum monthly mortgage payment = Monthly income x 28
Maximum monthly mortgage payment = $42,666.67 x 28
Maximum monthly mortgage payment = $1,194,666.76
Step 3: Calculate the loan amount:
Loan amount = Maximum monthly mortgage payment / Mortgage constant
Mortgage constant = (1 - (1 + interest rate)^-number of payments) / interest rate
Loan amount = $1,194,666.76 / 0.0055
Loan amount = $217,211,412.73
Step 4: Calculate the closing costs:
Closing costs = Loan amount x 5%
Closing costs = $217,211,412.73 x 0.05
Closing costs = $10,860,570.64
Step 5: Determine the maximum amount for the house purchase:
Maximum house purchase price = Loan amount + Closing costs - Savings
Maximum house purchase price = $217,211,412.73 + $10,860,570.64 - $530,000
Maximum house purchase price = $227,541,983.37 - $530,000
Maximum house purchase price = $227,011,983.37
Therefore, the maximum amount your client can afford to pay for the house is $227,011,983.37. Keep in mind that this calculation assumes all other financial factors stay constant and does not include additional expenses like property taxes or insurance.