Chapter 6, Problem 2DTM

Buying a Vacation Home. Barrie and Inga Adlington, of Birmingham, England, have just finished putting their three daughters through college. As empty-nesters, they are considering purchasing a vacation home in the United States on a lake because prices have dropped in recent years. The house might also serve as a retirement home once they retire in 6 years. The Adlingtons’ net worth is $383,000 including their home worth about $265,000 on which they currently owe $43,000 for their first mortgage, with a $778 per month payment. Their outstanding debts in addition to their mortgage include $12,500 on one car loan ($256 monthly payment), $13,700on a second car loan ($287 monthly payment), and a $25,000 second mortgage on their home taken out to help pay for their daughters’ college expenses ($187 monthly payment). Their income is $100,000.

1. Calculate the Adlingtons’ debt-to-income ratio.
2. Advise them as to the wisdom of borrowing to buy a vacation home at this time.