Tutorial 4 - Consumer Credit Solutions

1072 Words5 Pages
Tutorial 4 – 6th Feb 2013 Topic – Consumer Credit Problem Questions - Consumer Credit 1. A few years ago, Michael Tucker purchased a home for $100,000. Today, the home is worth $150,000. His remaining mortgage balance is $50,000. Assuming that Michael can borrow up to 80 percent of the market value, what is the maximum amount he can borrow? Suggested Solution Present market value of Michael’s home = $150,000. Michael can borrow up to 80 percent of the market value, or $120,000. Michael still owes $50,000 mortgage on his home. Therefore, he can borrow an additional $70,000 ($120,000 - $50,000). 2. Louise McIntyre’s monthly gross income is $2,000. Her employer withholds $400 in federal, state, and local income taxes and $160 in Social Security taxes per month. Louise contributes $80 per month for her IRA. Her monthly credit payments for VISA, MasterCard, and Discover card are $35, $30, and $20, respectively. Her monthly payment on an automobile loan is $285. What is Louise’s debt payments-to-income ratio? Is Louise living within her means? Suggested Solution Louise’s Gross Income Less: Income taxes Less: Social Security Tax Less: IRA contribution Net take-home pay = = = $2,000 -400 -160 = = -80 $1,360 Her monthly payments on VISA, MasterCard, Discover Card, and a car loan add up to $370 per month. Louise’s debt payments to income ratio is 370 to 1,360, or 27.2 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 $272 (20 percent of $1,360). 3. Robert Thumme owns a $140,000 townhouse and still has an unpaid mortgage of $110,000. In addition to his mortgage, he has the following liabilities: Visa MasterCard Discover card Education loan Personal bank loan Auto loan Total $565 480 395 920 800

More about Tutorial 4 - Consumer Credit Solutions

Open Document