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 $30,000 down payment and then financing a $285,000 mortgage at an annual interest rate of 4.00% (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 (0.040/12); 2) the total number of monthly payments; and 3) the mortgage amount.

a.Find the monthly payments if the $285,000 was financed over 15 years.

b.Find the monthly payments if the $285,000 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 $6500 per month, this would equate to $1820 per month. Assuming monthly costs of $300 for property tax and homeowner's insurance, this would allow for a $1520 monthly mortgage payment. Assuming that a family wants a monthly payment of $1520, 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 $1520 monthly payment, give the mortgage that a family could afford at an annual interest rate 4.00% for a 15-year mortgage.

b.Assuming that a family wants to make a $1520 monthly payment, give the mortgage that a family could afford at an annual interest rate 4.00% for a 30-year mortgage.

3.Based on your answers to questions 1 and 2, what is the advantage of having a 15-year mortgage, and what is the advantage of having a 30-year mortgage? Which option do you think is wiser?

4.Proverbs 22:7 says, "The rich rules over the poor, and the borrower is the slave of the lender." In light of this verse, and the Bible's more general teaching on debt, many Christians have counselled that incurring excessive debt is undesirable. As financial expert Dave Ramsey puts it: "If you must take out a mortgage, pretend only 15-year mortgages exist." Discuss how you would apply the Bible's warning about borrowing when deciding how to go about purchasing a home. Does the Bible prohibit any kind of borrowing? Does it influence which type of mortgage is more attractive? Or does it not really apply to this type of loan?