Question

You are thinking about buying a house. You find one you like that costs ​$200,000. You learn that your bank will give you a mortgage for ​$160,000 and that you would have to use all of your savings to make the down payment of ​$40,000. You calculate that the mortgage​ payments, property​ taxes, insurance,​ maintenance, and utilities would total ​$960 per month.Given the information​ above, if the interest rate on your savings account was 55 percent a​ year, then the yearly opportunity cost of using this money for a down payment would be equal to ​$??

Answer 1

By using your $40,000 to buy the house, you give up the opportunity to earn interest on that money. If you could earn 55% interest, then the opportunity cost is 0.55 x $40,000 = $22,000 per year, or $1833.33 per month. This does not imply that you should not buy this house. It does imply, however, that you need to think carefully about opportunity cost as you weigh this decision. An economist would tell you that the monthly cost of owning this home is $960 + $1833.33 = $2793.33

PLEASE CHECK THE INTEREST RATE WHICH YOU HAVE MENTIONED IN THE QUESTION. YOU HAVE SPECIFIED THE INTEREST RATE AS 55%.