The bower family wants to make a home improvement that is expected to cost $60,0

Question

The bower family wants to make a home improvement that is expected to cost $60,000. They want to fund as much of the cost as possible with a home equity loan but can afford payments of only $600 per month. Their bank offers home equity loans at 12% compounded monthly for a maximum term of 10 years.

a. How much cash do they need as a down payment?

b. Their bank account pays 8% compounded quarterly. If they delay starting the project for 2 years, how much would they have to save each quarter to make the required down payment if the loan rate and estimated cost remain the same?

Explanation / Answer

SOLUTION: Loan: PVA = PMT [PVFAk,n] = $600 [PVFA1,120] = $600 (69.7005) = $41,820.30 a. Savings req: $60,000 - $41,820.30 = $18,179.70 b. Save-up: FVA = PMT [FVFAk,n] = PMT [PVFA2,8] $18,179.70 = PMT (8.5830) PMT = $2,118.10

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