My dream home aspirations are all over the place, from waterfront property
to a big house on tons of land out in the middle of nowhere.
For the purpose of this discussion, I chose a waterfront home in St. Clair
Shores, Michigan. This home is a 10,000 square foot house, with 1000 feet
of private waterfront on Lake St. Clair.
(Zillow Inc. 2022)
This home is currently listed for $995,999 on Zillow, to put a 20% down
payment on the home, I would have to come up with $199,199.80. This
would bring the total value of the loan to $796,799.2 I started out with a 30-
year mortgage, as instructed, a The home I chose is located in Bradenton Beach,
Florida. We visited the area this summer and one of the local beaches (Coquina Beach)
was so beautiful. This home has gorgeous beach views! This home is currently on the
market for $2.985 million (Zillow, n.d.). A 20% down payment is $597,000, leaving
$2.388 million to be financed. According to FRED, the most current 30 year fixed rate
(11/10/22) is 7.08% (FRED, 2022). Applying that interest rate to the loan amount resulted
in a $16,015.93 monthly payment. Under these conditions, $3,377,735.47 is paid in
interest over the life of the loan. I first wanted to see what the impact that a lower interest
rate and a shorter loan term would have on the interest paid over the lifetime of the loan
(because my initial loan calculations had a lifetime interest total that was higher than the
original loan itself). On line two of table below I reduced the interest rate to 5.5% and
shortened the loan term to 240 months (20 years). Interestingly, the monthly payment did
not change very much (approx. $400), but the lifetime interest paid went way down to
around 1/3 of what it was. While I expected the lifetime interest to decrease with these
adjustments, I didn’t expect it decrease quite this much. Finally, I decided to try
increasing the down payment to 30%, leaving the interest rate at 5.5%, and returning to
the 30-year loan. This brought the monthly payment down, but the lifetime interest back
up. The shorter the term and/or lower interest rate are the best bet, but I was surprised at
just how much of an impact they made.
Down pymt
Loan
amount
Interest
rate
# of pymts
Payment
amt
Lifetime int
597,000
2,388,000
7.08%
360
16,015.93
3,377,735.47
597,000
2,388,000
5.5%
240
16,426.75
905,438.61
895,500
2,089,500
5.5%
360
11,863.95
2,181,522.43
References
30-year fixed rate mortgage average in the United States. FRED. (2022, November 10).
Retrieved November 16, 2022, from
https://fred.stlouisfed.org/series/MORTGAGE30US
Zillow, I. (n.d.). 105 4th St N, Bradenton Beach, FL 34217: MLS #A4531889. Zillow.
Retrieved November 16, 2022, from https://www.zillow.com/homedetails/105-4th-
St-N-Bradenton-Beach-FL-34217/99747770_zpid/
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nd because it is the most common mortgage length in the United States
(Nowacki 2022). The current 30-year fixed interest rate, obtained from
FRED, is 7.08%.
Over the life of a 30-year mortgage, the lifetime payments for this loan
would be a staggering $1,923,841.46, meaning that $1,127,042.26 would be
going to interest, over a million dollars in interest alone.
Manipulating the variables:
Interest rate: I will first start by decreasing the interest rate to a rate that
was available just two years ago, a rate my company offered, 2.95%. This
rate would save you over $700,000 over the course of this loan. With this
rate lifetime payments fall to $1,201,640.08, and the amount going to
interest is $404,840.88. This interest savings is enough to make anyone hope
for better interest rates in the future.
Down Payment: While a 20% down payment is standard on mortgage loans,
some people choose to put more money down to save themselves on the
interest cost over the life of the loan. It is not unheard of for someone to put
down 40% or even more on a loan. At 40% you would only be financing
$597,599.40. This would drop the lifetime payments on the mortgage to
$1,442,881.10, with $845,281.70 going to interest over the term of the loan.
Saving you nearly $300,000 over the life of the loan on interest. This leads us
to an important concept I have learned working in the mortgage industry,
the more money you can put down, the better. This may seem like a
commonsense concept, but I cannot tell you how many clients would rather
keep that extra 20% in their pockets.
Changing the interest rate and down payment: To give an idea of how both
variables can have a large impact over the life of a loan, I changed the
interest rate back to the 2.95%, the best rate available in recent memory,
with a 40% down payment. While on this house of nearly a million dollars
you would need a hefty down payment of nearly $400,000 to be able to do
this. You would only be financing again $597,599, the lifetime payments on
the mortgage would be $901,230.06, meaning that you would only be paying
$303,630.66 in interest over the term of the loan. Obviously, the best option
so far, but may be unrealistic for many people.
Mortgage term: Although this assignment called for 30-year mortgage, I
wanted to check a 15-year mortgage as well. 15-year mortgages offer many
benefits, including a slightly lower interest rate. They also pay for less time
meaning less overall in interest payments. This is offset by higher monthly
payments (Keilar 2022). According to FRED the average interest rate on a 15-
year mortgage is 6.38%. Using this and a standard 20% down payment we
come up with the following. Total lifetime payments of $1,239,933.77, with
$443,134.57 of that going to interest. While this is not an option for
everyone, it is worth looking into if you are able. This is an interest savings of
nearly $800,000 over the average 30-year mortgage.
References:
30-year fixed rate mortgage average in the United States. FRED. (2022, November 10).
Retrieved November 16, 2022, from
https://fred.stlouisfed.org/series/MORTGAGE30US
Kielar, H. (2022, August 15). 15 vs. 30 year mortgage comparison. 15 Vs. 30 Year
Mortgage Comparison | Rocket Mortgage. Retrieved November 16, 2022, from
https://www.rocketmortgage.com/learn/15-vs-30-year-
mortgage#:~:text=Borrowers%20with%20a%2015%2Dyear,the%20life%20of%20th
eir%20mortgage.
Nowacki, L. (2022, August 15). The average mortgage length in the U.S. Rocket
Mortgage. Retrieved November 16, 2022, from
https://www.rocketmortgage.com/learn/average-mortgage-
length#:~:text=Mortgages%20typically%20come%20with%20a,to%20pay%20back
%20their%20loan.
Zillow, I. (2022, November 11). 22670 Madison St, Saint Clair Shores, MI 48081: MLS
#20221060646. Zillow. Retrieved November 16, 2022, from
https://www.zillow.com/homedetails/22670-Madison-St-Saint-Clair-Shores-MI-
48081/83422247_zpid/
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