The Time Value of Money-Preparing for Home Ownership
Upon graduating from Argosy University with a degree in Finance, John Simple found a great job as a banking officer with Capital Two Bank in Dallas. Although he and his partner Joan had several college loans that required payments, their goal was to set aside funds for the next five years so that they could get out of the small apartment in Irving, Texas. After reviewing the listings in the areas surrounding DFW and speaking to their bosses about possible transfers, John and Joan decided upon Plano as their desired future location for a home.
Based on house prices they received from a local realtor, they determined that the home they needed currently costs around $178,000 which includes 2% closing costs. To avoid paying Private Mortgage Insurance, John and Joan need to make a down payment of 20%. Since they are saving for the potential purchase, it will be five years before they buy the home. This gives them time to save for the down payment, moving, and furniture costs, which they estimate will be 10% more than the required down payment. They also expect home prices in Plano to continue to increase each year at 2.5% per annum rate as presented by their realtor.
John, being the finance graduate, wanted to adequately prepare for their future purchase and told Joan that he would take all this information and present an overview of how much would be required once their estimated purchase date became a reality. In addition, John would show how much money they needed to save each month in their house investment account at E-Trade, which averages 5% annual return.
Tasks:
Write a 2-3-page paper where you answer the questions above. Make sure you identify the question and then respond showing all calculations using math or Excel functions.
What is the estimated purchase price of the home in 5 years?
How much would need to be saved for the down payment?
How much would need to be saved for closing, moving, and furniture costs?
Considering that they have $10,000 already saved (half of which was provided by Joan's parents as a wedding gift), how much money do they need to save each month to reach their goal?
Suppose John could change investment plans at E-Trade and earn an additional 1.5% per annum without additional risk, how much money do they need to save each month to reach their goal? How much in investment dollars would they save by increasing their investment percentage?