Math Skill 5 - Affordability Calculations

“How much house can I afford? How much should I borrow for college? Can I afford that car?” These are examples of the types of questions that can be answered using an affordability calculation. These calculations are just a variation on the credit cost calculations where you start with a monthly expense and work backwards towards the sales price. Just like with credit cost calculations, these work with any amortizing loan.

Process & formulas:

1. Find Loan Payment = Total Monthly Budget Available– non-loan expenses

· “Total Monthly Budget Available” is the amount of money you feel comfortable spending on the house, car, etc. For problems in the workbook, this number will simply be given to you. However, in real life you will have to determine for yourself how much money you can afford to pay each month for a house or car or other loan. This can be estimated using the debt-service-to-income ratio we learned in Skill 2. You will need to analyze your own financial statements to ensure that your total monthly debt expenses are less than 36% of your total income each year.

· “Non-loan expenses” refers to costs of owning the items that are not a part of the loan. For example, houses and cars have insurance, property taxes, and maintenance expenses that are all part of the cost of owning them. These have to be subtracted from the amount you can afford to pay each month in order to prevent overspending.

2. Find Loan amount = Solve TVM for PV, using loan payment from step 1 as PMT

3. Find Sales Price = Loan amount + Down Payment

Example Questions

Example 1

Malorie has $25,000 saved up for a down payment on a house and wants to know how much of a house she can afford. She looks at her budget and decides she would be comfortable with a $1,900 per month total expense. If she can get a 30-year mortgage for 8.5% and she expects taxes, maintenance, and insurance to be $450 per month, how much can she afford to pay for a house?

1) Her total monthly expense that she can afford is $1,900, but the house has $450 per month in other expenses. Therefore…

Loan Payment = $1,900 - $450 - $1,450 per month

2) Compute Loan Amount

N = 30 * 12, I/Y = 8.5% / 12, FV = 0, PMT = -1,450, Compute: PV = $188,577

3) Sales price = $188,577 + $25,000 = $213,577

Example 2

Tyrone figures he can trade in his old car for $9,000. Looking at his budget, he decides he can afford a monthly vehicle expense of $450 per month. His insurance and taxes on the car are estimates to be $110 per month. How much can he afford to pay for his new car, if his bank offers him a 5-year loan at 7.5%?

1) His total monthly expense that he can afford is $1,900, but the car has $450 per month in other expenses. Therefore…

Loan Payment = $450 - $110 = $340 per month

2) Compute Loan Amount

N = 5 * 12, I/Y = 7.5% / 12, FV = 0, PMT = -340, Compute: PV = $16,967

3) Sales price = $16,967 + $9,000 = $25,967

Example 3

Jennie wants to buy a house. The total amount she feels comfortable paying for the house each month is $1,400. She does some research and estimates that her property taxes will be $120 per month, maintenance will be $100 per month, and property insurance will be $75 per month. If she can get a mortgage for a 6.5% interest rate for 30 years and a $15,000 down payment, what is the most she can afford to pay for a house?

1) Her total monthly expense that she can afford is $1,400, but the house has taxes, insurance, and maintenance expenses. Therefore…

Loan Payment = $1,400 – $120 – $100 - $75 = $1,105 per month

2) Compute Loan Amount

N = 30 * 12, I/Y = 6.5%, FV = 0, PMT = -1105, Compute: PV = $174,822

3) Sales price = $174,822+ $15,000 = $189,822

Watch it in Action!

Practice Questions

*Note that there are five questions here relating to mortgages, five relating to car loans, and five relating to student loans.

1) Brett wants to buy a house. They have $57000 saved for a down payment. They have been approved for a 15-year loan at a 7.1% interest rate. The maximum they want to spend each month is $1350 and they expect $440 per month in taxes, insurance, fees, and maintenance. What is the most they can afford to pay for a house?

2) Parker wants to buy a house. They have $86000 saved for a down payment. They have been approved for a 30-year loan at a 5.2% interest rate. The maximum they want to spend each month is $1370 and they expect $540 per month in taxes, insurance, fees, and maintenance. What is the most they can afford to pay for a house?

3) Jake wants to buy a house. They have $35000 saved for a down payment. They have been approved for a 15-year loan at a 5.1% interest rate. The maximum they want to spend each month is $980 and they expect $280 per month in taxes, insurance, fees, and maintenance. What is the most they can afford to pay for a house?

4) Bryan wants to buy a house. They have $72000 saved for a down payment. They have been approved for a 30-year loan at a 6.8% interest rate. The maximum they want to spend each month is $1050 and they expect $230 per month in taxes, insurance, fees, and maintenance. What is the most they can afford to pay for a house?

5) Meghan wants to buy a house. They have $50000 saved for a down payment. They have been approved for a 15-year loan at a 6.5% interest rate. The maximum they want to spend each month is $920 and they expect $330 per month in taxes, insurance, fees, and maintenance. What is the most they can afford to pay for a house?

6) Kimberly wants to buy a car. They have $6100 in trade-in value from their old car to use as a down payment. They have been approved for a 7-year loan at a 7.3% interest rate. The maximum they want to spend each month is $600 and they expect $170 per month in taxes, insurance, fees, and maintenance. What is the most they can afford to pay for their next car?

7) Mckensi wants to buy a car. They have $12600 in trade-in value from their old car to use as a down payment. They have been approved for a 7-year loan at a 7.2% interest rate. The maximum they want to spend each month is $770 and they expect $190 per month in taxes, insurance, fees, and maintenance. What is the most they can afford to pay for their next car?

8) Sarah wants to buy a car. They have $5900 in trade-in value from their old car to use as a down payment. They have been approved for a 5-year loan at an 8.7% interest rate. The maximum they want to spend each month is $400 and they expect $100 per month in taxes, insurance, fees, and maintenance. What is the most they can afford to pay for their next car?

9) Callista wants to buy a car. They have $4500 in trade-in value from their old car to use as a down payment. They have been approved for a 4-year loan at a 11.1% interest rate. The maximum they want to spend each month is $670 and they expect $130 per month in taxes, insurance, fees, and maintenance. What is the most they can afford to pay for their next car?

10) Josh wants to buy a car. They have $6300 in trade-in value from their old car to use as a down payment. They have been approved for a 5-year loan at a 10.7% interest rate. The maximum they want to spend each month is $630 and they expect $180 per month in taxes, insurance, fees, and maintenance. What is the most they can afford to pay for their next car?

11) Tyler is wondering how much to borrow for college. After researching their chosen industry and career path, they feel like they will probably be comfortable paying $190 per month. They have been approved for a student loan with a 10-year repayment plan and a 6.7% interest rate. What is the most they can afford to pay for their education?

12) Sydney is wondering how much to borrow for college. After researching their chosen industry and career path, they feel like they will probably be comfortable paying $170 per month. They have been approved for a student loan with a 10-year repayment plan and a 6.7% interest rate. What is the most they can afford to pay for their education?

13) Liah is wondering how much to borrow for college. After researching their chosen industry and career path, they feel like they will probably be comfortable paying $230 per month. They have been approved for a student loan with a 10-year repayment plan and a 5.8% interest rate. What is the most they can afford to pay for their education?

14) Kristen is wondering how much to borrow for college. After researching their chosen industry and career path, they feel like they will probably be comfortable paying $260 per month. They have been approved for a student loan with a 10-year repayment plan and a 10.6% interest rate. What is the most they can afford to pay for their education?

15) Justin is wondering how much to borrow for college. After researching their chosen industry and career path, they feel like they will probably be comfortable paying $150 per month. They have been approved for a student loan with a 10-year repayment plan and an 8.5% interest rate. What is the most they can afford to pay for their education?

Solutions