Suppose you wish to own a home in the near future. Today is December 31, 2018 an

Question

Suppose you wish to own a home in the near future. Today is December 31, 2018 and on this date each year for the next 5 years, you will deposit money in an account earning 6% compounded annually in order to save for a 20% down payment. Beginning January 31, 2024 and every month thereafter for 20 years, you believe that you'll be able to afford monthly mortgage payments of $1,800 on the remaining balance of the home value (ignoring property taxes and insurance), assuming a mortgage rate of 3% compounded monthly. How much must you deposit at the end of each of the next five years to meet your home ownership goal?

Explanation / Answer

calculate 80% of the loan i.e the value of monthly payments

N = 240, FV = 0, rate = 3%/12, PMT = 1800

use PV function in Excel

loan taken = 324,559.6459

downpayment = 20% of total value or 1/4 of the loan = 1/4 * 324,559.6459

FV = 1/4*324,559.6459, PV = 0, N = 5, rate = 6%

use PMT function in Excel

annual payments = 14,393.93

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