Question

Your monthly income is $10,000 per month. Your mortgage payment is $1600, student loan payments are $500, car payments are $400 and credit card payments (paying down a credit card debt) are $1000. You are thinking of taking out a home equity loan to remodel your house. In order to keep your debt to income ratio below 36%, what is highest monthly payment you could afford on the home equity loan? If the term of the loan is 5 years and the interest rate is 5%, what is the largest loan the lender will consider giving you?

Answer 1

Income = $ 10000, Mortgage Payment = $ 1600, Student Loan = $ 500, Car Payment = $ 400 and Credit Card Payments = $ 1000

Total Monthly Debt Payouts = 1600 + 500 + 400 + 1000 = $ 3500

Required Debt to Income Ratio = 36%

Therefore, Maximum Possible Debt Payout = 0.36 x 10000 = $ 3600

Highest Affordable Monthly Payment = Maximum Possible Debt Payout - Total Monthly Debt Payout = 3600 - 3500 = $ 100

Available Loan Term = 5years or (12 x 5) = 60 months and Interest Rate = 5 %

Therefore, Largest Possible Loan = Present Value of Highest Affordable Monthly Payments discounted at 5 % over 5 years

Largest Possible Loan = 100 x (1/0.05) x [1-{1/(1.05)^(60)}] = $ 1892.93