The Time Value for Money – Preparing for Home Ownership

Most people in America desire to own a house or home. However, a few people have information of a property management and demands to houses, as well as about the kinds of loan that can assist them in buying.

Most people in America desire to own a house or home. However, a few people have information of a property management and demands to houses, as well as about the kinds of loan that can assist them in buying. Most Americans do not have knowledge on mortgage lending firms, mortgage financing and the role of mortgage lenders. Most creditors will not give loans to people whose credit cards do not score 640 and above. Although some people would opt to buy a house instead of taking loans or mortgages, most of the Americans do not have enough money for it what is often mention in case briefs

John and Joan are looking to buy a house in five years, which requires them to save a great amount of money for the down payment. John has been employed in a bank and that will give him a good employment history to make a down payment of 20%. This paper describes different mortgages for home buyers in the US and provides calculations regarding the cost of John and Joan’s desired house in five years, the amount of down payment that will be required by then and the amount they need to save per month to meet their goals.

Different Methods of Loan Affordable for Home Buyers

There are different methods of buying houses in America. One method is the Veteran Administration (VA) home loan, which grants permission to banks, mortgage lenders and credit unions to offer the VA mortgages. This method is ordinarily used by Americans because it is not very strict and is one of the most affordable.

The second method is the United States Department of Agriculture (USDA) mortgage, which allows sellers to pay a closing amount of up to 6% maximum and borrowers to receive a loan that is equal to 100% of appraised value of the house.

Thirdly, there is the Federal Housing Authority (FHA) mortgage, which has become popular for people with small amount of money or no money and allows them to use a down payment of 3.5% of the purchasing price. Notably, the down payment amount can come from gifts and should not be provided directly by the borrowers.

The fourth method is the conventional mortgage with only 5% down payment that requires a very high credit card score (over 700 points) and a strong employment history.

The fifth method is using the money from a retirement account. Employees who have worked for many years and whom the employer allows withdrawing money from the retirement account can use this money as down payments for buying a house.

Lastly, one can use lender credits. Banks, mortgage lenders, and credit unions can help lender with a certain amount of money for a down payment. There will be a charged fee and some of it comes from the interest charged on loan.

Since John is considered to have a good credit history and a high-score credit card, and since, together with Joan, they are paying a down payment of 20%, their mortgage is a conventional mortgage type.

Approximate Cost of the Home in the Next Five Years

Due to inflation rate, the costs of most commodities are expected to increase in the nearest future. In addition, the value of money will also increase. Given these two facts, the home that John and Joan want to buy currently will not have the same price in five years. Given the current price of the house as $178,000 (which includes the closing cost) and a 2.5% annual interest rate, it is possible to calculate the cost of the house in the next five years’ time. Using the simple interest rate formula, as indicated in the Excel table, the house will cost $200,250.

Amount Required for Down Payment

Joan and Joan will be required to pay a down payment of 20%, which means it will be 20% of the price of the house at the time of payment. In five years, they will be required to pay $400,500 as the down payment.

Amount for Closing, Moving and Furniture

From the information provided by the realtor, the cost of closing, moving and furniture will be 10% more than the down payment amount. This can be converted into decimal points as 10/100, which is 0. 1. If they will be required to pay the down payment of $40,050, then, the amount for closing, moving and furniture will state (0.1*40,050) that is $4,055.

Amount Required to be Saved Each Month to Reach Their Goal

Saving is one of the methods that people use to get money for a down payment on the house mortgage. Saving in banks has an advantage of an annual return. Depending on the mortgage that one uses, the amount of a down payment varies. Since John and Joan’s mortgage is the mortgage of conventional type and due to the requirements of this type of mortgage, the money for a down payment must come out of their pocket. They have a saving of $10,000 but half of this amount comes from Joan’s parents as a wedding gift and therefore, the $5,000 cannot be used as the down payment.

The E-trade, where they will be saving their money, has an annual return of 5% per annum, which reduces their burden of saving large amounts of money. Assuming that they save money without an annual return, they would require collecting $584.14 per month in the next five years. Since they will be saving in E-trade, they will only pay $554.96 per month because of the benefits from the interest.

Amount to Save per Month if Investments Plan Changes

After saving for one year, the amount remaining to be saved will be $28,390.50, which means that John and Joan will need to pay $591.47 every month after one year of saving. Nevertheless, since they are saving with E-trade that will have increased an annual rate to 6% in the second year, they will need to save $555.98. If John changes the investment plan to one, which increases the annual rate of interest to 7%, they will have to save only $543.28.

Given the different methods of buying homes, one would need to calculate the amount he/she would require to pay for a down payment. Since John has a secured job in a bank, he will have a good job history in the next five years to have the conventional mortgage as the method to buy a home. The mortgage, however, requires down payments from the borrower’s pocket and, therefore, the $5,000 from Joan’s parents wedding gift will not be accepted as the down payment amount. Since they want a house that will cost $200,250 in five years, they will need to save $40,050 as the down payment. Given the different investment plan they have, they can pay as minimal as $543.28 per month to reach their goal of saving for the down payment.


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