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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.

Solution Summary

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

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