front-end ratio
Seth and Cassie Moore of Holyoke, Massachusetts, have an annual income of $120,000 and want to buy a home. Currently, mortgage rates are 7 percent. The Moores want to take out a mortgage for 30 years. Real estate taxes are estimated to be $4800 per year for homes similar to what they would like to buy, and homeowner’s insurance would be about $720 per year.
(a) Using a 28 percent front-end ratio, what are the total annual and monthly expenditures for which they would qualify?
(b) Using a 36 percent back-end ratio, what monthly mortgage payment (including taxes and insurance) could they afford given that they have an automobile loan payment of $470, a student loan payment of $350, and credit card payments of$250?
(c) If mortgage interest rates are around 7 percent and the Moores want a 30-year mortgage, use the information in the Did You Know box to estimate how much they could borrow given your answer to part b.
front-end ratio