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    Kim and Dan Bergholt are both government workers. They are considering purchasing a home in the Washington D.C. area for about $280,000. They estimate monthly expenses for utilities at $220, maintenance at $100, property taxes at $380, and home insurance payments at $50. Their only debt consists of car loans requiring a monthly payment of $350.

    Kim's gross income is $50,000/year and Dan's is $35,000/year. They have saved about $60,000 in a money market fund on which they earned $5,840 last year (included in the $60,000). They plan to use most of this for a 20% down payment and closing costs. A lender is offering 30-year variable rate loans with an initial interest rate of 7% given a 20% down payment and closing costs equal to $5,400.

    Before making a purchase offer and applying for this loan, they would like to have some idea whether they might qualify.

    1. Estimate the affordable mortgage and the affordable purchase price for the Bergholts.

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    Solution Preview

    20% down payment means 20% X $280,000 = $56,000, and $5,400 closing costs sums up to $61,400

    Given that they have about $60,000 right now, this is pretty much enough to cover the down payment.

    Now we look at their monthly payments.

    Their family income is 50,000+35,000 = $85,000/year, this is $7083/month (is this before tax or after tax?).

    their ...