See all of the Money Blog entries in this series.

THE SCENARIO

John and Jane Smith want to retire in 12 years, they currently have $250,000 invested in a bond fund earning 2.8%, and they need $875,000 to retire.  Their house payment is $1,330, and they currently owe $97,500.  It will be paid off in 12 years.  (7% borrowing rate)


THE QUESTION 

If they can get a 15 year mortgage on their house at 3.5%, and can afford a $1,330 payment (their current payment),

A) How much can they borrow?

B) How much would they still owe on this mortgage when they retire in 12 years?

C) If they still want their house to be paid off when they retire, then they’ll need to add this to their target amount.  How much money will they need if this is the case?


THE SOLUTION

A) How much can they borrow?

N = 180

I/YR = 3.5%

PMT = -$1,330

FV = $0

PV = $186,044.55

 They could borrow $186,044.55 on their new mortgage to keep the same payment that they’ve had ($1,330).

B) How much would they still owe on this mortgage when they retire in 12 years?

N = 144

I/YR = 3.5%

PV = $186,044.55

PMT = -$1,330

FV = -$45,389.27

After 12 years, they’ll still owe $45,389.27 on this mortgage.

C) If they still want their house to be paid off when they retire, then they’ll need to add this to their target amount.  How much money will they need if this is the case?

$875,000 + $45,389.27 = $920,389.27

If they want to pay off their house when they retire and have $875,000 left over, they need to have $920,389.27 in their investment account when they retire.

Read the next part in this series!

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Money Blog – What yield do I need? # 7
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