Question

You are considering the purchase of a $600,000 house using a regular fixed rate mortgage loan...

You are considering the purchase of a $600,000 house using a regular fixed rate mortgage loan with a 20% down payment; what is the monthly payment (not including taxes and insurance) using a 30-year (5.0%), 20-year (4.50%), and a 15-year (4.00%)? How much total interest would you pay using the three different loans over the course of the loan? What are the pros and cons of using a 5/1 adjustable rate mortgage?

Homework Answers

Answer #1

1.
Monthly payment

30 year:
=600000*(1-20%)*5%/12*1/(1-1/(1+5%/12)^(12*30))=2576.74379045826

20 year:
=600000*(1-20%)*4.5%/12*1/(1-1/(1+4.5%/12)^(12*20))=3036.71700585586

15 year:
=600000*(1-20%)*4%/12*1/(1-1/(1+4%/12)^(12*15))=3550.50204292443

2.
Interest

30 year:
=600000*(1-20%)*5%/12*1/(1-1/(1+5%/12)^(12*30))*12*30-600000*(1-20%)=447627.764564975

20 year:
=600000*(1-20%)*4.5%/12*1/(1-1/(1+4.5%/12)^(12*20))*12*20-600000*(1-20%)=248812.081405406

15 year:
=600000*(1-20%)*4%/12*1/(1-1/(1+4%/12)^(12*15))*12*15-600000*(1-20%)=159090.367726397

3.
Pros: Beneficial in falling rate environment
Cons: Dangerous in rising rate environment and financial planning is difficult

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