Buying a Vacation Home

Barrie and Inga Adlington, of Birmingham, England, have 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 Adlingtons' net worth is $382,000 including their home worth about $266,000 on which they currently owe $43,000 for their first mortgage, with a $798 per month payment. Their outstanding debts in addition to their mortgage include $12,200 on one car loan ($257 monthly payment), $13,700 on a second car loan ($294 monthly payment), and a $25,700 second mortgage on their home taken out to help pay for their daughters' college expenses ($185 monthly payment). Their income is $110,000.

Calculate the Adlingtons' debt-to-income ratio. Round your answer to two decimal places.

_______________ %

Advise them as to the wisdom of borrowing to buy a vacation home at this time.

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ogorwyne ogorwyne · Answer 1 · 2022-03-09T10:48:13+01:00

The debt to income ratio is 86 percent. This is high so the family should not buy a house.

First mortgage = $43,000

Outstanding debts = $12,200

Car loan = $13,700

Second mortgage =$25,700

The total debt that this family is owing is given as

$43,000+ $12,200+$13,700+$25,700

= 94600 dollars

The total income that this family makes is given as $110,000.

The debt to income ratio would be

94600/$110,000.

= 0.86

Therefore the debt to income ratio that this family has is 86%.

Given that their debt to income ratio is high, it is advisable that the family has to stay away from purchasing a new house.

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