Mortgage Loooans?

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 could be used for a down payment. Since they do not 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.

d) If the Young鈥檚 use the $20,000 as a down payment, their monthly payments will decrease. Determine the difference of the monthly payments in parts (a) and (b).

e) Assume that the difference in monthly payments, part (d), is invested each month at a rate of 6% compounded monthly for 25 years. Determine the value of the investment in 25 years.

Mortgage Loooans?mortgage rate

I don%26#039;t have much time and I suppose you need the answers, not a qualitative point, but the only real-life comparison here is this: the value of a lower payment (in that it leaves more money for any purpose they might have) but which they could achieve by drawing down on the investment when needed vs. the fact that the freed up money can only return 6% while the paid down loan would effectively earn 9.5% by reducing interest paid. Essentially, this is the better investment (9.5% vs. 6%). Unless the investment has some expected return rate other than the 6% mentioned (i.e.: the existing investment and the investment method that returns 6% are not the same) AND higher than 9.5%, they will earn more by taking it down and paying down the mortgage whether as a down payment or as a later payment against principal.

Practical concerns other than this include keeping a reserve against unexpected reverses and the variability of many investment returns, making it hard to assess a return on the original investment that is close to the 9.5% vs. the certainty of the 9.5% return on house loan.

Mortgage Loooans?

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