Financial math help

Question

Caroline has been looking at condos in BC. She finally finds one she likes listed at $289 000. She has saved up $60 000 for a down payment. Assume an interest rate of 4.2%. Caroline has a take home (or after tax) income of $42 000 per year, although she expects that to rise a little in the next few years as she earns raises at work.

a) Conventional wisdom says you should spend about 30-35% of your budget on housing. Based on her income, how much should Caroline be spending on her house each year?

b) How much does that leave Caroline to spend on housing each month?

c) What amortization period allows Caroline to fit her monthly mortgage payments into this range? Explain what values you changed and tested to determine this.

d) By roughly how much does the interest rate swinging 0.5% higher or lower affect monthly payments, and the total interest paid on the mortgage? Assume a 25 year amortization.

Answer 1

a) & b) are direct arithmetic. Income x (.3-.35) = .3xIncome-.35cIncome ... Monthly is 1/12th of it

The rest of this is "can you operate a financial calculator?" I will use 33% and list the steps for an HP12C

PMT = $????

FV = $0

PV = $229,000

i = .35%

n = 360

Via trial and error I got to 339 months = $1,155 as the payment that matches 33% of take home pay on a monthly basis.

Here is an online mortgage calculator tool - https://www.mortgagecalculator.org/

Understand, the point of this question is 1) concept and 2) competence using the machine. Go to the web site and trial and error a basic mortgage term until you can anticipate the direction of change after you try and have some feel for the amount.

My steps to get to 339 months = $1,155 per month was 360, 350, 340, 339. All I did was change "n" until PMT matched my target.