Because the down payment of $10,000 and $4,000 is tied up, there is an opportunity cost to giving up the down payment to purchase the house instead of investing it. In the textbook example, they have included this opportunity cost, but only calculated it as simple interest. As we know, returns compound over time, so let’s see what the value of these upfront home ownership costs would be if we invested them in stocks instead of purchased the home.
Using an annual rate of return of 7% (no need to divide by 12), calculate the opportunity cost of using $14,000 as the down payment. We will assume Amelia took out the mortgage loan for 30 years.
Hint: Use your time value of money set up and calculate $14k invested at 7% over 30 years
PV: $14,000
N: 30
I: 8%
PMT: $0 (we’re not adding to it)
FV: ???
How much is the down payment worth after 30 years?