Question

Shauna wants to buy a house and plans to rent the apartment located in the basement for extra income. The house has a purchase price of $195,600 and she will make a 5% down payment. Shauna has qualified for a 30 year mortgage with a fixed rate of 5.875%. Approximately how much rent should she charge for the apartment in order to cover her monthly mortgage payment if she only wants to spend $400 a month of her own money?
a.
$300
b.
$700
c.
$1100
d.
$1150

Answer 1

Purchase price = $195,600. Down payment = 5% = $9,780, so loan principal = $195,600 − $9,780 = $185,820.

Monthly rate r = 0.05875/12 ≈ 0.00489583, n = 360. Monthly payment
M = P * [r / (1 − (1+r)^−n)] ≈ 185,820 * 0.00592 ≈ $1,100.

If Shauna only wants to spend $400/month herself, rent needed ≈ $1,100 − $400 = $700.

Answer: b. $700