The Young family is purchasing a $130,000 house with a VA mortgage. The bank is offering them

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Question:

The Young family is purchasing a $130,000 house with a VA mortgage. The bank is offering them a 25- year mortgage with an interest rate of 9.5%. They have $20,000 invested that they could use for a down payment. Since they don’t 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.

Option 1 DO NOT MAKE down payment If they Young’s do not make the down payment they will finance $130,000 with monthly payments of $1135.81. The total cost of the house would be $340,473 and $210,743 of this would be interest. If they invest the $20,000 in an account with an APR of 10% compounded quarterly, in 25 years the accumulated amount of the investment would be $236,274.33.

1) If the Young’s choose option 1 and do not make the down payment, what is the difference between the amount they have in their investment after 25 years and the total cost that they spend on the house?

Option 2 MAKE a $20,000 down payment

2) Determine the amount of the mortgage if they make the $20,000 down payment.

3) Determine the monthly payment for principal and interest if they make a $20,000 down payment.

4) Determine the total cost of the house if they make a down payment of $20,000.

5) How much of the total cost is interest?

6) If the Young's use the $20,000 as a down payment, their monthly payment will decrease. Determine the difference of the monthly payments from option 1 to option 2.

7) Assume that the difference in monthly payments is invested in an ordinary annuity each month at a rate of 6% compounded monthly for 25 years. Determine the value of the investment in 25 years.

8) If the Young’s choose option 2 and make the down payment, what is the difference between the amount they have in their ordinary annuity after 25 years and the total cost that they spend on the house?

9) Use the information from options 1 and 2 to analyze the problem. Would you recommend that the Young's not make the down payment and keep the $20,000 invested (as in option 1) or make the down payment of $20,000 and invest the difference in their monthly payments (as in option 2)? Explain.