In your text you examined how to work through various time value of money problems. In this example you are asked to calculate the price of the home that you can afford based upon interest rates now and in the future (today verses in one year).
In this example you are interested in purchasing a new home in the next year. Your concern is the Federal Reserve (The Fed) is expected to increase interest rates over the next year, (upwards of 2% is projected). As a result, you want to decide if you should buy now of wait.
Variables to consider in your decision include the following.
Based upon your current salary you decide that you can afford $2000.00 per month. (Or, how much home can you afford with a budget of $2000 per month?)
Your bank has approved you for a (30 year) loan at an interest rates of 5%.
1) Based upon the above information, how much value (in dollars) can you currently afford when buying home at this 5% rate?
2) How much value (in a home) can you afford if you wait until next year if interest rates increase by 1% (to 6%)?
3) How much value (in a home) can you afford if you wait until next year if interest rates increase by 2% (to 7%)?
4) Show all work and give a brief summary explaining the difference in calculations and how you achieved your answers. Discuss how interest rates impact the amount of home a person can buy, and discuss how this can impact other purchasing decisions.
You may use any method you choose to determine the calculation (Excel, tables, bankrate.com, mortgage calculator etc.).
