Michael and Angela Simmons of Chicago, Illinois have an annual income of $78,000 and want to buy a home. Currently, mortgage rates are 6 percent. The Simmons' 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 $1500 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? (Hint: Subtract these amounts from the total monthly affordable payments for their income to determine the amount left over to spend on a mortgage.)