# Bergholts - Solution 1 To be able to answer this question...

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Solution 1) To be able to answer this question, we would need to calculate the annual expenses (of the mortgage plus their current obligations) and compare those to the combined annual income of the Bergholts: Annual repayment cost of mortgage: Since the Bergholts would be making a 20% down payment, then the amount to be financed = \$280,000 - \$56,000 = \$224,000 Final value of mortgage = 30 \$224,000 (1.08) × = \$2,254,035 Sum of repayments (S) = 30 ( ) 1 [ (1.08 )] 1 113.283 1 1.08 1 n AR A A R - - = = - - Since Sum of repayment = Final value of mortgage Therefore, 113.283A = 2,254,035 A = \$19,897 Expenses: Maintenance \$100 Property Tax \$380 Home Insurance \$50 Utilities \$220 Car Loan \$350 Total Monthly Expenses \$1,100 Total Annual Expenses \$13,200 Income Gross Income from salary = \$55,000 + \$38,000 = \$93,000 Net Income (55% marginal rate) = 93,000 * 55% = \$51,150 Income from savings = 60,000 + 5,840 – Down Payment (56,000) = \$9,840 5% annual earning on money market fund = 9,840 * 5% = \$492 Net annual income after purchase of property = 51,150 + 492 = \$51,642 Therefore, Affordability = Net annual income – (expenses + annual repayments) = 51,642 – (13,200 + 19,897)

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= \$18,545 The Bergholts can afford to purchase the house because their annual income will exceed costs by \$18,545 when they make a purchase. The mortgage here is assumed to be the full cost of the house with a down payment of 20%. However, research has shown that
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Bergholts - Solution 1 To be able to answer this question...

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