Question

Buying a Vacation Home. Barrie and Inga Adlington, of Birmingham, England, had just finished putting their three daughters through college. As empty-nesters, they are considering purchasing a vacation home in the United States on a lake because prices have dropped in recent years. The house might also serve as a retirement home once they retire in 6 years. The Adlington's net worth is $383,000 including their home worth about $265,000 on which they currently owe $43,000 for their first mortgage, with a $778 per month payment. Their outstanding debts in addition to their mortgage include $12,500 on one car loan ($256 monthly payment), $13,700 on a second car loan ($287 monthly payment), and a $25,000 second mortgage on their home taken out to help pay for their daughters' college expenses ($187 monthly payment). Their income is $100,000.

(a) Calculate the Adlingtons' debt-to-income ratio.

Answer 1

Answer:

Debt-to-income ratio = Monthly debt payments / Gross monthly income,

= (778 + 256 + 287 + 187) / (100000 / 12)

= 18.10%

Adlingtons' debt-to-income ratio = 18.10%