Question

Peter wants to buy a duplex with a purchase price of $226,950. Peter can afford a 10% down payment. Peter earns $2,985 a month and wants to spend no more than 10% of his income on his mortgage payment. Peter is going to rent out the other half of the duplex. He thinks that if he charges $900 a month in rent this will cover the remainder of his mortgage payment. Given that Peter has a 30 year mortgage with a fixed rate of 6.25%, how should Peter adjust how much he charges for rent of the other half of the duplex?
a.
Peter should increase the rent by $200.
b.
Peter should increase the rent by $60.
c.
Peter should increase the rent by $10.
d.
Peter should keep the rent at $900.

Answer 1

Loan = 226,950(0.90) = $204,255.

Monthly rate r = 0.0625/12 = 0.0052083333, n = 360. Monthly payment
PMT = P * r / (1 - (1+r)^-n) ≈ 204,255 * 0.0052083333 / (1 - (1.0052083333)^-360) ≈ $1,256.98.

Peter can pay at most 10% of $2,985 = $298.50. So rent needed = 1,256.98 − 298.50 ≈ $958.48.
That is about $58.48 more than $900, so he should raise the rent by about $60.

Answer: b.