Michael is looking to purchase a home.  He is trying to determine how big of a mortgage (and consequently home) that he can afford.  He has examined his budget and has determined that he can make monthly payments of $1,500/month.  Michael has also been shopping various mortgages, and he has found that he can get a 30 year fixed, fully amortized mortgage at 4.5% interest.  With these numbers in mind, what is the size of the largest mortgage that he can afford?

Answer: (keystrokes for 10bii financial calculator)

N = 360 (it is a 30 year mortgage, and there are 360 months in 30 years)

I = 4.5 (this is the interest rate of the mortgage)

PV = ??? (this is what we are solving, it is the size of the mortgage balance)

PMT = -$1,500 (these are the payments that Michael can afford.  Note that the numbers are negative because we are looking at it from Michael's perspective and he will be giving the money from his pocket to the bank, so it must be entered as negative in the calculator.  If one looked at it from the bank's perspective, it would be the opposite.)

FV = 0 (it is a fully amortized loan, so it will be paid off after 360 months)

Enter the above numbers into your calculator and when you solve for PV the answer is $296,041.74.   This is the largest sized mortgage that Michael can afford and still keep his payments at $1,500/month for a 30 year, fully amortized mortgage at 4.5% interest.

 

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