Debt and Credit Card Debts
1. A few years ago, Simon Powell purchased a home for $150,000. Today, the home is worth $250,000. His remaining mortgage balance is $100,000. Assuming that Simon can borrow up to 75 percent of the market value, what is the maximum amount he can borrow? (LO 5.2)
Present market value of Simon’s home = $250,000. Simon can borrow up to 75 percent of the market value, or $187,500. Simon still owes $100,000 mortgage on his home. Therefore, he can borrow an additional $87,500.
2. Louise McIntyre’s monthly gross income is $3,000. Her employer withholds $700 in federal, state, and local income taxes and $250 in Social Security taxes per month. Louise contributes $100 per month for her IRA. Her monthly credit payments for VISA and MasterCard are $65 and $60, respectively. Her monthly payment on an automobile loan is $375. What is Louise’s debt payments-to-income ratio? Is Louise living within her means? (LO 5.3)
Louise’s Gross Income
Less: Income taxes
Less: Social Security Tax
Less: IRA contribution
Net take-home pay
Her monthly payments on VISA, MasterCard, and a car loan add up to $500 per month. Louise’s debt payments to income ratio is 500 to 1,950, or 25.6 percent. This ratio exceeds the recommended 20 percent figure. Therefore, Louise is overextended. Her maximum monthly loan and credit card payments should not be over $390.
3. Robert Sampson owns a $175,000 townhouse and still has an unpaid mortgage of $140,000. In addition to his mortgage, he has the following liabilities:
Personal bank loan
Robert’s net worth (not including his home) is about $35,000,. This equity is in mutual funds, an automobile, a coin collection, furniture, and other personal property. What is Robert’s debt-to-equity ratio? Has he reached the upper limit of debt obligations?