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Revision as of 14:40, 2 December 2018
Contents
How to Plan Buying a House
Introduction
For most people, buying a first house is a milestone event in life and represents a major financial decision. In this project, we analyze the mathematics of three factors involved in buying a home: salaries, investments, and mortgages. As an example of our theory, we provide the scenario of a recent computer science graduate living and working in Denver, Colorado, who is planning to buy a house in 5 years.
Salary
| Year | 2019 | 2020 | 2021 | 2022 | 2023 |
|---|---|---|---|---|---|
| Salary | 97,477.48 | 99,398,08 | 101,318,67 | 103,239,27 | 105,159.87 |
Investments
There are several types of investment opportunities available. We plan to invest 10% of the salary into investments following the project statement. Types of investments we considered included:
- Savings Account: The standard bank savings account. Unfortunately the interest rates are not as high as other options.
- Fixed CD: A CD pays a fixed interest rate that is generally higher than a savings account, with the penalty that the money cannot be taken out for a period, generally five years.
- Deferred Annuity: A deferred annuity is a retirement savings that enables one to pay money for a fixed income after retirement, with a large penalty for withdrawal of any money before age 59.5. Since we plan to invest for five years, this is not a good choice.
- Money Market: A money market is an investment fund in the stock market, with the risks and rewards of investment.
- Variable CD:
| Company | APY | Maximum years | Minimum for APY |
|---|---|---|---|
| Synchrony | 3.10 | 5 | 2000 |
| Citizens | 3.15 | 5 | 5000 |
| Capital One | 3.10 | 5 | 0 |
Mortgages
A mortgage is a special type of loan between the bank and you for a house. The loan works by providing the house as collateral, meaning that if you fail to pay off the loan, the bank takes your house. A typical mortgage starts with a "downpayment" of at least 3.5% of the houses value. If the house costs $100,000, then before receiving the loan one must pay at least $100,000 * 0.035 = $3500 first. The bank then pays the remainder of the house cost to the previous owners of the house. Over time, the loan works by paying both the interest and the principal - the original $100,000 cost of the house.
