Buchanan/Hawthorne 1

Jackie Buchanan Michael Hawthorne Math 1030-Group Project #1 Buying a House March 2, 2013

Buchanan/Hawthorne 2 The home we chose for this project was a lovely 6 bedroom, 3.5 bath rambler on Carlquist Drive in Draper, UT. The listing price for this home was $429,900.00. Assuming we made a 20% down payment of $85,980, we would be left with a mortgage of $343,920. The two lending institutions we compared were Jordan Credit Union and Zions Bank. Jordon Credit Union was less expensive for both the 15-year and the 30-year mortgage, so we decided to use them. The rate that Jordon quoted on Feb 25, 2013 was 2.75% for a 15-year fixed rate mortgage, and 3.375% for a 30-year fixed rate mortgage. We decided to begin our mortgage payments on May 1, 2013. After we entered the data into the amortization schedule for both time frames we made some interesting discoveries. We outlined our findings in the table below: 15-Year Fixed Rate Mortgage Pros and Cons 1. (Pro) You get a much lower interest rate. (2.75% instead of 3.375%) 2. (Pro) You save over $127,000 in interest over the life of the loan. 3. (Pro) You begin the loan paying more in principal each month than interest. 4. (Con) The monthly payment is considerably higher; you wind up paying about $813 more each month. 30-Year Fixed Rate Mortgage Pros and Cons 1. (Pro) Your monthly payment is quite a bit smaller ($1520 instead of $2333) which makes the home more affordable. 2. (Con) The interest rate is higher (3.375%) 3. (Con) You pay much more interest over the life of the loan 4. (Con) You pay more interest than principal until the 115th payment.

Mortgage Amount: $343,920.00/Begins May 1, 2013 15-Year Fixed Interest Rate Monthly Payment Total Amount Paid Total Interest Relative Difference Between Total Amount Paid and the Mortgage Pay-Off Date: 2.75% $2333.91 $420,102.91 $76,184.80 22.2% 30-Year Fixed 3.375% $1520.46 $547,364.09 $203,444.68 59.2% Actual Difference -.625% $813.45 $-127,261.18 $-127,259.88 -37%

April/2028

May/2043

-15 Years, 1 Month

Source: Jordan Credit Union Rates as of 2/25/13

Buchanan/Hawthorne 3 Looking at the blue table that compares the 15-Year fixed rate mortgage to the 30-Year fixed rate mortgage, we immediately see that in every category, the 15-Year rate comes out ahead, with the exception of the much higher monthly payment. For the purpose of this assignment, we are assuming that we cannot afford to commit to a $2300 monthly house payment, but we like the idea of saving some of the huge amount of interest accrued on the 30-Year loan. Therefore, we will compare other, more affordable, options to see if we can get our total interest payment brought down to a more reasonable level.

Mortgage Amount: $343,920.00/Begins May 1, 2013 15-Year Fixed 30-Year Fixed (+$100/mo.) 3.375% $1620.46 $524,242.01 $180,322.01 Actual Difference

Interest Rate Monthly Payment Total Amount Paid Total Interest

2.75% $2333.91 $420,102.91 $76,184.80

-.625% +713.45 $-104,139.10 $-104,137.21

Relative Difference Between Total Amount Paid and the Mortgage Pay-Off Date

22.2%

52.4%

-30.2%

April/2028

May/2040

-12 Years, 1 Month

Source: Jordan Credit Union Rates as of 2/25/13

The pink table compares the regular 15-year fixed rate to the 30-year fixed rate plus an extra monthly payment of $100. By making this extra payment, we take 3 years off the life of the 30 year loan, making the pay-off date difference between the two loans 12 years and 1 month.
Mortgage Amount: $343,920.00/Begins May 1, 2013 15-Year Fixed 30-Year Fixed (+938/mo.) 3.375% $2458.46 $437,642.59 $93,722.59 Actual Difference

Interest Rate Monthly Payment Total Amount Paid Total Interest

2.75% $2333.91 $420,102.91 $76,184.80

-.625% -$124.55 -$17,539.68 $-17,537.79

Buchanan/Hawthorne 4 Relative Difference Between Total Amount Paid and the Mortgage. Pay-Off Date 22.2% 27.3% -5.1%

April/2028

April/2028

Source: Jordan Credit Union Rates as of 2/25/13

The green table compares a 15-Year fixed rate to that of a 30-Year fixed rate plus an additional monthly payment to bring the payoff date down 15 years. By comparing these two types of loans, we see that the 15-Year still comes out ahead, due to the lower fixed interest rate. However, the difference isnt that big. The monthly payment of the 30-Year fixed with the extra $938 payment is only $124 dollars more than the first loan, and over the 15 years you pay an additional $17,000. While you do wind up paying more this way than if you just took the original 15-Year fixed mortgage the extra cost is worth the security of knowing that if you couldnt afford to make such a large additional monthly payment, you werent obligated to do so.

Mortgage: $343,920.00/Begins May 1, 2013 30-Year Fixed 30-Year Fixed (+$20,000 on 05/2018) 3.375% $1520.46 $522,743.96 $178,823.96 52% Actual Difference

Interest Rate Monthly Payment Total Amount Paid Total Interest Relative Difference Between Total Amount Paid and the Mortgage Pay-Off Date

3.375% $1520.46 $547,364.09 $203,444.68 59.2%

0 0 $24,620.13 $24,620.72 7.2%

May/2043

Dec/2040

2 Years, 5 Months

Source: Jordan Credit Union Rates as of 2/25/13

With the orange table, we decided to compare the difference between the 30-Year fixed rate mortgage, and the same 30-Year fixed rate mortgage with an additional one-time payment of $20,000 on year 5 of the loan. We were surprised to see that even by paying such a large extra payment, we only saved 2 years and 5 months off the life of the loan.

Buchanan/Hawthorne 5

Mortgage: $343,920.00/Begins May 1, 2013 30-Year Fixed 30-Year Fixed (+$100/mo.) 3.375% $1620.46 $524,242.01 $180,322.01 Actual Difference

Interest Rate Monthly Payment Total Amount Paid Total Interest

3.375% $1520.46 $547,364.09 $203,444.68

0 $-100.00 $23,122.08 $23,122.67

Relative Difference Between Total Amount Paid and the Mortgage

59.2%

52.4%

6.8%

Pay-Off Date

May/2043

May/2040

3 Years, 0 Months

Source: Jordan Credit Union Rates as of 2/25/13

With the purple table, we decided to compare the regular 30-Year fixed rate mortgage to the 30-Year Fixed Rate plus an extra $100 per month. Simply by paying an extra $100 per month, we saved 3 years While the information presented in these tables is helpful when you are considering a new mortgage, they dont tell the entire story. There are other factors that play into a mortgage that affect the monthly payment. Some of those factors include: lender fees (appraisal fee, credit report fee, tax service fee, underwriting fee, origination fee, processing fee, flood certification fee, commitment fee, application fee, loan lock fee, broker fee, inspection fee, administration fees, lawyer fees) mortgage insurance, homeowners insurance, and taxes. Not all lenders will charge all these fees, so it is a good idea to shop around and find out what extra fees will be included with each lender you look at. These fees are customarily added into the life of the loan, and they can raise the monthly payment hundreds of dollars. For example, when I entered my homes purchase price into the loan calculator, I was given a monthly payment that is $400 less than what I actually pay per month. Another important factor to think about when considering a mortgage is discount points. Discount points are a form of pre-paid interest. One point equals one percent of the loan. Borrowers can offer to pay a lender points in order to reduce the interest on the mortgage. For each point purchased, the loan rate is typically reduced by 0.125%. A new homebuyer needs to consider these factors before buying a home in order to make sure that their actual monthly payment will be manageable.

Buchanan/Hawthorne 6 (Jackie) This project was eye-opening for me and helped me to realize, for the first time, just how effective making extra payments on your mortgage can be. Now that I understand how interest is calculated, and how to use amortization schedules, I plan on putting my new skills to use by making extra payments on my mortgage and watching to see how much money those extra payments save me. (Michael) After doing the assignment, I have found that there are a number of different factors that come into play when getting a mortgage. I can see that these are maybe there to make it easier to get a loan for when buying a house. There are as well numerous factors that may benefit you as well as make it hard or have you spending too much of your money. The pros and cons of the above assignment is a great idea on how you can make the loan more beneficial for your needs. I like how with a little research of your lender you can find something that fits you. One thing that I would say to be careful of is that the numbers can get confusing and to watch the math involved. I have found that this kind of investigation and footwork can pay off in the end and help you so that you will not be so financially strapped and able to build a budget within your means. This kind of assignment would be good for any kind of loan that may take some time paying off.

http://www.bankrate.com/calculators/mortgages/amortizationcalculator.aspx?ec_id=m1082526&ef_id=Px1QHGT6-zsAAB3j%3a20130304035932%3as