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Home Financing Decisions

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Newlyweds Eric and Pamela have finally found the house that they have been looking for and are anxious to make an offer. The 3 bedroom house is on the market for $156,100 and will require that the couple complete some repairs such as installing a new roof and replacing the deck in the back of the house. They estimate these repairs at about $15,000. The house is currently assessed at $150,000, however the real estate agent is confident that if they make the repairs, the market value of the house would increase to $175,000.

a. Eric and Pamela have saved $12,000 for the down payment on the house. Based on the purchase price of $156,100, compute the monthly principal and interest payment on a 30 year mortgage at 6.25%.

b. Find the total amount of interest that Eric and Pamela will pay over the 30 years of the mortgage.

c. In order to pay the $15,000 for the necessary repairs to the house, the couple has a choice between two options:
Borrow the $15,000 from the bank at 8% interest, compounded quarterly for 5 years.
Increase the mortgage amount to include the $15,000, bringing the total amount financed to $159,100

Compute the total interest paid over the life of the loan for each of these options.

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Solution Summary

This solution illustrates how to use time value of money concepts to evaluate different home financing alternatives.