Econ 185 Fall 2004

The 28% Rule

In order to be able to resell mortgages in the secondary market, banks ensure that borrowers satisfy the 28% rule. That is, the total mortgage payment can be no more than 28% of gross income.

How much income do you need to buy a house in Chapel Hill?

Business Investment Decisions

There are two equivalent investment criteria. Make an investment if and only if

(1) The present value of the benefits is at least as large as the present value of the costs.

or

(2) The rate of return is at least as large as the interest rate on borrowed money.

We used the decision to invest in a college education to illustrate the first of these decision rules.

It makes a big difference if you allow for growth in income over time.