Comparing and Contrasting 15- and 30-year Mortgages This next exercise will walk you through comparing the ongoing costs of owning a home with either a 15- or 30-year mortgage. To simplify things for this assignment, I will provide some of the information for you but you can always use this template to explore potential homes (and their costs) on your own. Im assuming youve already determined your budget. Once youve done that, you can use a site such as www.zillow.com or www.realtor.com or www.homesteadnet.com to search for homes that fit your budget, desired location, and other criteria. (I searched and selected a home in Brighton among other things, its close to MCC, its in a great school district, and fits characteristics I was looking for). Price of the home (This is the asking price; although you may be able to negotiate a lower price, well use this price in our mortgage payment calculations below). $149,900 Annual real estate taxes on the home (from the information on the website) $6,120/year Monthly real estate taxes on the home $6,120/year 12 months = $510/month OK, so now that youve found a prospective home and know its price and the real estate taxes, lets look at current interest rates: Go to www.loan.com or www.bankrate.com or other mortgage rate sites and search for the lowest rates you can find on both 30-year and 15-year mortgages with no points. I did this for you see table below. Rates are based on a credit score of 740+ and were current as of March 14, 2021. What is the best 30-year mortgage rate you can find (with no points)? 3.230% What is the best 15-year mortgage rate you can find (with no points)? 2.490% Now, figure out how much you are going to borrow. In other words, calculate the amount of the mortgage you will be undertaking. (I also did this for you). Price of the home from above $149,900 Amount of your cash down payment (20% of the price) $29,980 Amount of mortgage (price of home down payment) **This assumes all closing costs will be paid with cash and not included in the mortgage amount. $119,920 You can now calculate the amount of your monthly mortgage payments. Go to www.mortgage101.com. Use the amortization calculator there (under Mortgage Calculators, Amortization) to compute your monthly payment if you borrow the amount above at the above 30- and 15-year rates. Ive used the calculator to compute the monthly payments for you now your job is to fill in the shaded cells in the tables below; instructions are included in the left column. Note: after you calculate the monthly payments, you can click on the box next to Full Amortization and then select Calculate under the inputs on the left side of the page to see the interest and principal reduction components of each payment for the life of the mortgage loan. Using the 30-year rate you found above, determine: Monthly payment, which will include principal & interest $520.58 Total amount of money to be paid over the life of the loan (Multiply the monthly payment x length of the mortgage in months). Total amount borrowed $119,920 Total amount of interest to be paid over the 30-year life of the loan (Total paid amount borrowed) Using the 15-year rate you found above, determine: Monthly payment, which will include principal & interest $799.05 Total amount of money to be paid over the life of the loan (Multiply the monthly payment x length of the mortgage in months). Total amount borrowed $119,920 Total amount of interest to be paid over the 30-year life of the loan (Total paid amount borrowed) Assuming an ANNUAL homeowners insurance cost of $1,200, complete the missing information in the following table to illustrate the monthly cash outflows for each of the two loan options: 15-year loan 30-year loan Monthly mortgage payment (Principal & Interest) $799.05 $520.58 Real estate taxes $510.00 $510.00 Homeowners insurance $100.00 $100.00 Total monthly cash outflow for Principal, Interest, Taxes & Insurance Total interest paid over the life of the loan (from the tables above this one) Extra interest paid if 30-year loan is chosen (Total interest for 30-year loan total interest for 15-year loan) Based on the summary above, which loan would YOU choose, and WHY? There is no right or wrong answer, as long as your answer is supported by financial facts and logic. Compare and contrast the pros and cons of each option in your response. Go to next page