13 The Smith family wants to make a home improvement that is expected to cost $1

Question

13

The Smith family wants to make a home improvement that is expected to cost $100,000. They want to fund as much of the cost as possible with a home equity loan, but can afford payments of only $800 per month. Their bank offers equityloans at 12% compounded monthly for a maximum term of 10 years.+ a. How much cash do they need as a down payment? 6. b. Their bank account pays 8% compounded quarterly. Ifthey delay start ng he project for two years, how much would they haveto save each quarter to make the required down paymentif thie s, how much would they have to save each quarter to make therequired down payment if the loan rate and estimated cost remains the same?

Explanation / Answer

a) Loan Amount = pv(rate,nper,pmt,fv)

rate = 12%/12 = 1%

nper = 10*12 = 120

pmt = 800

fv = 0

Loan Amount = pv(1%,120,800,0)

Loan Amount = $ 55,760.42

Cash needed as down payment = 100000 - 55760.42

Cash needed as down payment = $ 44,239.58

b)

Saving Each Quarter = pmt(rate,nper,pv,fv)

rate = 8%/4 = 2%

nper =2*4 = 8

pv = 0

fv = 44239.58

Saving Each Quarter = pmt(2%,8,0,44239.58)

Saving Each Quarter = $ 5154.34

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