You have decided that you want to buy a home in 6 years, you believe you can afford a house that is $240,000

Question

You have decided that you want to buy a home in 6 years, you believe you can afford a house that is $240,000.

 

A.) If you want to have 15% for a down payment, how much will you need to have for the down payment?

    
B.) You decide to start investing money now so that you will have the down payment in 6 years when you are ready to purchase the home.  How much should you put into a mutual fund each month if you know you can earn 5.6% compounded monthly?       

 

C.) The day has finally arrived, you have saved your down payment, and are ready to purchase your home.  How much money will you be taking as a loan?   

 

D.) What would your monthly payments be if you get a 30-year fixed mortgage at 2.9%

Answer 1

A. house price = $240,000 x 0.15 = $36,000 for the down payment

 

B. the formula to determine this number is complex, and requires a logarithmic solution. The formula is

Future Value = Principal [(1 + r/m)^mt - 1) ÷ r/m] where r = annual interest rate, m = number of compounding periods, and t = number of years.

In this case, the FV is $36,000, r = .056, m = 12, and t = 6

We want to solve this equation for P, which will yield about $425 per month

 

C. loan amount = price - down payment = $240,000 - 36,000 = $204,000

 

D. the formula for monthly payment is MP = [P x r(1 + r)^t] ÷ (1 + r)^t -1], where P = loan amount, r = annual rate, and t =  number of years

When this formula is used, the monthly payment will be about $930