The Everything Everyday Math Book by Christopher Monahan

Author:Christopher Monahan [Monahan, Christopher]
Language: eng
Format: epub
ISBN: 978-1-4405-6644-8
Publisher: F+W Media
Published: 2014-05-03T16:00:00+00:00

Chris and Diane buy a home for $250,000. They pay 15% as a down payment and finance the rest with a 15-year, 3.45% mortgage. Determine the amount of their mortgage payment.

First, Chris and Diane make a down payment of $37,500 (0.15 × $250,000), which leaves $212,500 for them to finance. Using the Hofstra online calculator, leave the PMT box blank and enter FV = 0, PV = 212500, r = 0.0345, m = 12, and t = 15. Click on the Compute button next to the box for PMT to learn that their monthly payment will be $1,513.91.

Example: Mike and Aileen buy a home for $275,000. They qualify for a 30-year mortgage at 3.75%. They are debating whether to make a 10% down payment or a 15% down payment on the purchase. Compute the monthly payment for each case, and compare their options.

A 10% down payment ($27,500) leaves a balance of $247,500. With PV = 247500, r = 0.0375, m = 12, and t = 30, the monthly payment is $1,146.21.

A 15% down payment ($41,250) leaves a balance of $233,750. With PV = 233750, r = 0.0375, m = 12, and t = 30, the monthly payment is $1,082.53.

Spending an extra $13,750 today saves Mike and Aileen $63.68 a month. There are two ways to think about this. On the one hand, they can use the $13,750 to fix up the house without having to borrow more money now, or they can invest it, which makes sense if they can get a higher return than 3.75%. On the other hand, they will pay an extra $63.68 for 360 months—a total of $22,924.80. Consider what you would do if you had to make this choice.

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