To discuss:
Total cost of home mortgage and amount of interest in it.
Introduction:
PITI is a short form for principal, interest, tax and insurance payments. Generally, buyer has to pay property tax and insurance along with interest and principal amount of the home purchase. PITI limit is 28% of one’s pretax monthly income.
Explanation of Solution
According to 28%:
Total interest paid:
Given,
Total repayment is $644,400.
PVis $374,935.62.
Formula to calculate total interest is,
Where,
- PVis present value.
Substitute, $644,400 for total repayment and $374,935.62 for PVin the above formula.
Total interest paid is $269,464.38.
Working notes:
Calculation for amount that can be used for payment of PITI,
Calculation for PMT,
Calculation for PV,
Calculation for total repayment,
According to 36%:
Total interest paid:
Given,
Total repayment is $518,040.
PVis $301,414.73.
Formula to calculate total interest is,
Where,
- PVis present value.
Substitute, $518,040 for total repayment and $301,414.73 for PVin the above formula.
Total interest paid is $216,625.27.
Working notes:
Calculation for amount that can be used for payment of PITI,
Calculation for PMT,
Calculation for PV,
Calculation for total repayment,
Hence, Total interest according to 28% and 36% is $269,464.38 and $216,625.27 respectively.
Want to see more full solutions like this?
Chapter 8 Solutions
Personal Finance (8th Edition) (What's New in Finance)
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education