Answers
a)
The money required for the down payment and closing costs = 0.15 x $ 250,000 + 0.04 x $ 250,000
The money required for the down payment and closing costs = $ 47,500
Using the future value of investment equation, we can calculate the time when there will be enough money for the down payment and closing costs.
Taking natural log on both sides of the equation
n = 4.51 years
Thus in 4.51 years, there will be enough money for the down payment and closing costs.
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b)
To buy the house in 3 years, the money to be saved each month for the down payment and closing costs is calculated as follows
The value of A is the amount to be saved each month to achieve the goal in 3 years
A = $ 1,189.58
Thus to buy the house in 3 years, a savings of $ 1,189.58 has to be made each month.
Future value of investment Present value X (1+ interest rate)"
S47,500 $35,000 x (1+0.07)
$47,500 1.07" $35,000
1.07 1.357142857
In 1.357142857 n In 1.07
In 1.357142857 n 1.07
A (1+rn-1 Future value of annuity= r
12x3 0.07 1 + 12 -1 S47,500 0.07 12 4
.
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