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)