Maryland Home Improvement PSI Practice Exam

What is the largest loan amount a borrower can afford if monthly payments are $1,000?

1. $158,100

2. $158,300

3. $175,900

4. $176,100

The correct answer is: $176,100

To determine the largest loan amount a borrower can afford with monthly payments of $1,000, it's essential to consider the loan term and interest rate. For many home loans, like a conventional 30-year mortgage, the monthly payment calculation involves both the principal amount and the interest on that loan. Using general mortgage formulas, the monthly payment is calculated with the loan principal, interest rate, and loan term. In this case, when the monthly payment is set at $1,000, the other factors—such as the interest rate (typically around 3-5% for a fixed-rate mortgage) and the period of the loan (30 years)—allow us to reverse-engineer the formula to find out the maximum loan amount. When we apply a standard mortgage calculator or the present value formula for mortgages, we can ascertain that with an interest rate factored in, a monthly payment of $1,000 can support a loan amount that is computed to approximately $176,100. This reflects the impact of the interest over the loan duration, resulting in a higher permissible loan amount for the designated monthly payment. The other choices represent lower loan amounts that would not reach the upper limit of what $1,000 a month in payments could sustain, given typical