Question
The Young family is purchasing a $130,000.00 house with a VA mortgage. The bank is offering them a 25-year mortgage with an interest of 9.5%.
The Young family is purchasing a $130,000.00 house with a VA mortgage. The bank is offering them a 25-year mortgage with an interest of 9.5%. They have $20,000.00 invested that could be used as a down payment. Since they do not need a down payment Mr. Young wants to keep the money invested. Mrs. Young believes that they should make a down payment of $20,000.
a. Determine the total cost of the house with no down payment
b. Determine the total cost of the house if they make a down payment of $20,000
c. Mr Young believes that the $20,000 investment will have an annual return of 10% compounded quarterly. Assuming that Mr. Young is right, calculate the value of the investment in 25 years (Use the compound interest formula on page 584)
d. If the Youngs use the $20,000 as a down payment, their monthly payments will decrease. Determine the difference in the monthly payments in parts a. and b.
e. Assume that the difference in monthly payments, is invested each month at a rate of 6% compounded monthly for 25 years. Determine the value of the investment in 25 years. (Use the ordinary annuity formula on page 620.)
f. Use the information from parts (a)-(e) to analyze the problem. Would you recommend that the Youngs make the down payment of $20,000 and invest the difference in their monthly payment as in part (e) or that they do not make the down payment and keep the $20,000 invested as in part (c)
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