a. What is our monthly income? b. Lending agencies usually require that no more than 28% of the borrower's monthly income be spent on housing. How much does that represent in our case?

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**Affordability Exercise: Understanding Mortgage Interest Rates**

**Overview:** Over the past 40 years, interest rates for 30-year mortgages have varied significantly, with a high of **14.75%** in July 1984 and a low of **3.31%** in November 2012. Lower interest rates enable more people to afford home purchases. This exercise explores buying a home priced at **$125,000** with a **$25,000** down payment, meaning a mortgage of **$100,000**. With an assumed annual income of **$40,000** and no other debts, we determine housing affordability at these high and low rates.

1. **Monthly Income Calculation:**
   - **Question (a):** What is our monthly income?

2. **Housing Cost Limit:**
   - **Question (b):** Lending agencies typically require that no more than **28%** of the borrower's monthly income be spent on housing. Calculate this amount for our scenario.

3. **Monthly Housing Expense:**
   - **Question (c):** Housing costs include the mortgage payment, property taxes, and insurance. Assume property taxes and insurance total **$250** per month. Subtract this from the part (b) result to determine the allowable monthly mortgage payment.

4. **Affordability at High Interest Rate:**
   - **Question (d):** Using part (c), determine the borrowing amount with a term of 30 years at an interest rate of **14.75%**. Can we afford the home?

5. **Affordability at Low Interest Rate:**
   - **Question (e):** Using part (c), determine the borrowing amount with a term of 30 years at **3.31%** interest. Can we afford the home now?

6. **Interest Rate Impact:**
   - **Question (f):** Calculate the difference in borrowing capacity between the rates in parts (d) and (e).

This exercise underscores how changes in interest rates impact housing affordability, guiding potential buyers in financial planning for home ownership.
Transcribed Image Text:**Affordability Exercise: Understanding Mortgage Interest Rates** **Overview:** Over the past 40 years, interest rates for 30-year mortgages have varied significantly, with a high of **14.75%** in July 1984 and a low of **3.31%** in November 2012. Lower interest rates enable more people to afford home purchases. This exercise explores buying a home priced at **$125,000** with a **$25,000** down payment, meaning a mortgage of **$100,000**. With an assumed annual income of **$40,000** and no other debts, we determine housing affordability at these high and low rates. 1. **Monthly Income Calculation:** - **Question (a):** What is our monthly income? 2. **Housing Cost Limit:** - **Question (b):** Lending agencies typically require that no more than **28%** of the borrower's monthly income be spent on housing. Calculate this amount for our scenario. 3. **Monthly Housing Expense:** - **Question (c):** Housing costs include the mortgage payment, property taxes, and insurance. Assume property taxes and insurance total **$250** per month. Subtract this from the part (b) result to determine the allowable monthly mortgage payment. 4. **Affordability at High Interest Rate:** - **Question (d):** Using part (c), determine the borrowing amount with a term of 30 years at an interest rate of **14.75%**. Can we afford the home? 5. **Affordability at Low Interest Rate:** - **Question (e):** Using part (c), determine the borrowing amount with a term of 30 years at **3.31%** interest. Can we afford the home now? 6. **Interest Rate Impact:** - **Question (f):** Calculate the difference in borrowing capacity between the rates in parts (d) and (e). This exercise underscores how changes in interest rates impact housing affordability, guiding potential buyers in financial planning for home ownership.
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