Question

Use the following advice from most financial advisors to solve the problem. ∙ Spend no more than 28% of your gross monthly income for your mortgage payment. ∙ Spend no more than 36% of your gross monthly income for your total monthly debt. Round all calculations to the nearest dollar, if necessary. Suppose that your gross annual income is $60,000. (a) What is the maximum amount you should spend each month on a mortgage payment? (b) What is the maximum amount you should spend each month for total credit obligations? (c) If your monthly mortgage payment is 70% of the maximum amount you can afford, what is the maximum amount you should spend each month for all other debt?

Answer 1

a) $1,400

b) $1,800

c) $820

Step-by-step explanation:

If the annual income is $60,000, the gross monthly income is I=60,000/12=5,000.

a) The maximum amount you should spend each month on a mortgage payment is:

`MP=0.28*I_m=0.28*5,000=1,400`

b) The maximum amount you should spend each month for total credit obligations (including mortage) is:

`DP = 0.36*I_m=0.36*5,000=1,800`

c) If we need only 70% of the maximum allowed for the mortage, we have more income available for other debt payments.

The 70% represents:

`MP'=0.7*(0.28*5,000)=980`

We substract this from the total budget for debt payments and we have the budget for all other debts but mortage:

`ODP=1800-980=820`