You are thinking about buying a house. You find one you like that costs $200,000. You learn that ...

Answer:

You have ignored the opportunity cost of the funds you are using for the down payment. By using your $40,000 to buy the house, you give up the opportunity to earn interest on that money. If you could earn 5% interest, then the opportunity cost is 0.05 x $40,000 = $2,000 per year, or $167 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 $950 + $167 = $1,017.