Kendall Is Considering the Purchase of a Home

question 39

Essay

Kendall is considering the purchase of a home.He has saved $20,000 for a down payment on a home and will finance the remainder of the purchase price with a home mortgage loan.Kendall currently rents an apartment for $900 per month and does not anticipate an increase in his monthly income.He wants to make sure that the monthly payment on his new home does not exceed $900,after-tax.Kendall has a marginal tax rate of 28 percent and an average tax rate of 22 percent.Assuming the monthly mortgage payment before-tax)will be equal to 1 percent of the initial mortgage balance and the entire amount of each monthly payment will be deductible home mortgage interest,what is the maximum amount that Kendall can spend on a new home?

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Definitions:

Selling Costs

Expenses associated with the selling process, including advertising, sales commission, and shipping costs.

Operating Loss

A situation where a company's operating expenses exceed its revenue, indicating that it is not making a profit from its core business activities.

Variable Costs

Costs that vary directly with the level of production or sales volume.

Fixed Costs

Fixed costs include payment for rent, employee salaries, and insurance expenses, which do not vary with production or sales volume.