Paying Off That Dream House When Jacqueline and Keith Sommers were \"house hunti

Question

Paying Off That Dream House When Jacqueline and Keith Sommers were "house hunting" five years ago, the mortgage rates were pretty high. The fixed rate on a 30-year mort- gage was 7.25%, while the 15-year fixed rate was at 6.25%. After walking through many homes, they finally reached a consensus and decided to buy a $300,000, two-story house in an up-and-coming suburban neighborhood in the Midwest. To avoid prepaid mortgage insurance (PMI), the couple had to borrow from family members and come up with a 20% down pay- ment and the additional required closing costs. Since Jacqueline and Keith had already accumulated significant credit card debt and were still paying off their college loans, they decided to opt for lower monthly payments by taking on a 30-year mortgage, despite its higher interest rate. Currently, due to worsening economic conditions, mortgage rates have come down significantly and a refinancing frenzy is underway. Jacqueline and Keith have seen 15-year fixed rates (with no closing costs) advertised at 2.75%, and 30-year rates at 3.75%. Jacqueline and Keith realize that refinancing is quite a hassle due to all the paperwork involved, but with rates being down to 30-year lows they don't want to let this opportunity pass them by. About two years ago, rates were down to similar levels, but they procrastinated and missed the boat. This time, however, the couple called their mortgage officer at the Uptown Bank and locked in the 2.75%, 15-year rate. Nothing was going to stop them from reducing the costs of paying off their dream house this time!

Explanation / Answer

cost of house

300000

down payment -20%

60000

Amount financed

240000

Monthly payment if 15 Years mortgage is opted

Using Pmt function in MS excel

pmt(rate,nper,pv,fv,type) rate = 6.25%/12 =.5125% nper =15*12 =180 pv =240000 fv =0 type =0

PMT(0.5125%,180,240000,0,0)

($2,044.76)

Monthly payment if 30 Years mortgage is opted

Using Pmt function in MS excel

pmt(rate,nper,pv,fv,type) rate = 6.25%/12 =.5125% nper =30*12 =360 pv =240000 fv =0 type =0

PMT(0.5125%,180,240000,0,0)

($1,462.15)

Excess of Monthly payment of 15 year mortgage over 30 year mortgage

2044.76-1462.15

582.61

2-

Interest paid over the life of 15 years mortgage loan

(monthly payment*no of months)-amount borrowed

(2044.76*180)-240000

128056.8

Interest paid over the life of 30 years mortgage loan

(monthly payment*no of months)-amount borrowed

(1462.15*360)-240000

286374

Difference in interest between two plan

286374-128056.8

158317.2

cost of house

300000

down payment -20%

60000

Amount financed

240000

Monthly payment if 15 Years mortgage is opted

Using Pmt function in MS excel

pmt(rate,nper,pv,fv,type) rate = 6.25%/12 =.5125% nper =15*12 =180 pv =240000 fv =0 type =0

PMT(0.5125%,180,240000,0,0)

($2,044.76)

Monthly payment if 30 Years mortgage is opted

Using Pmt function in MS excel

pmt(rate,nper,pv,fv,type) rate = 6.25%/12 =.5125% nper =30*12 =360 pv =240000 fv =0 type =0

PMT(0.5125%,180,240000,0,0)

($1,462.15)

Excess of Monthly payment of 15 year mortgage over 30 year mortgage

2044.76-1462.15

582.61

2-

Interest paid over the life of 15 years mortgage loan

(monthly payment*no of months)-amount borrowed

(2044.76*180)-240000

128056.8

Interest paid over the life of 30 years mortgage loan

(monthly payment*no of months)-amount borrowed

(1462.15*360)-240000

286374

Difference in interest between two plan

286374-128056.8

158317.2

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