Discussion Board Forum 1 Prompt
Topic Mortgages: 15-year vs. 30-year–
1. The median home price in February, 2019 was approximately $315,000
(source: https://www.census.gov/construction/nrs/pdf/uspricemon.pdf).
Assume that a family is purchasing a typical house by making a $35,000
down payment and then financing a $280,000 mortgage at an annual interest
rate of 4.50% (a typical rate for a 30-year loan in early 2019). The size of their
monthly payment will depend on the term of the mortgage.
The Excel function “pmt” can be used to compute these monthly mortgage
payments. The 3 arguments of function “pmt” are: 1) the monthly interest rate
(0.045/12); 2) the total number of monthly payments; and 3) the mortgage
amount.
a. Find the monthly payments if the $280,000 was financed over 15 years.
b.Find the monthly payments if the $280,000 was financed over 30 years.
c. Multiply your answer to part (a) by the number of payments to find how
much the family would need to pay in total over the life of the 15-year loan.
Subtract the principal amount from this to give the amount of interest paid
over the life of the loan.
d. Multiply your answer to part (b) by the number of payments to find how
much the family would need to pay in total over the life of the 30-year loan.
Subtract the principal amount from this to give the amount of interest paid
over the life of the loan.
2. A standard rule for lenders is that a family’s house payment should not
exceed 28% of their monthly income. For a family making $4500 per month,
this would equate to $1260 per month. Assuming monthly costs of $150 for
property tax and homeowner’s insurance, this would allow for a $1110
monthly mortgage payment. Assuming that a family wants a monthly payment
of $1110, the Excel function “pv” can be used to find the size of the mortgage
a family could afford for various mortgage terms and interest rates. The 3
arguments of function “pv” are: 1) the monthly interest rate; 2) the total
number of payments; and 3) the amount of each payment.
a. Assuming that a family wants to make a $1110 monthly payment, give the
mortgage that a family could afford at an annual interest rate 4.50% for a 15-
