Reflective Writing – Mortgage Project

By: Jacob Anderson

Part 1:

In part one I calculated a down payment for a home with a purchase price of $200,400. A 10% down

payment on the house would be $20,040. After the down payment is made, the loan amount would be

$180,360. I then figured out the monthly payment for a 30-year loan with a 4.86% interest rate. The

interest rate expressed as a decimal is 0.0486.

I used the loan formula to find the monthly payment amount.

I discovered the monthly payment amount to be $952.85. For 30 years of these monthly payments, the

total amount would be $343.026. The total amount of interest at a 4.86% rate would be $162,666.

Because it is wise not to exceed 35% of your income on housing expenses, it is important to calculate

the minimum monthly take-home pay is required to afford this house. The minimum monthly gross pay

would be $3,729.36. Annually, that needs to be multiplied by 12, which is $44,752.28.

 Reflective Writing – Mortgage Project
By: Jacob Anderson
Part 2:

I supposed that after living in the house for 10 years, it was time to sell it. In general, the value of real

estate increases over time. I calculated the approximate future value of the home by using the

compounded interest formula.

The original purchase price was $200,400 so the approximate future value is $296,640.96. I then figured

out if in this scenario I would have made or lost money by selling this house. I knew the down payment

was $20,040, the mortgage paid over 10 years was $114,342. And I tried to use the Loan Formula to find

the principal balance on the mortgage, but continually got a Syntax error when trying to raise the

amount to a negative exponent. I even took the positive reciprocal of the exponent instead and I could

not get a reasonable answer.

D = $952.85(1-1+.0486/12) ʌ-240

(.0486/12)
 Reflective Writing – Mortgage Project
By: Jacob Anderson
Part 3: 15 Year Mortgage

For this scenario I used the same purchase price, down payment, and loan amount from the original

question to calculate the cost of a 15-year mortgage.

A 3.55% annual interest rate as a decimal is 0.0355

Again, I used the Loan Formula to solve for the monthly payment; this time the value of N was 15

instead of 30:

I found the total monthly payment to be $1,293.80. The total cost of all payments for 15 years was

$232,884. The total amount of interest paid was $52,524. The difference in interest between the 30-

year loan and the 15-year loan was $110,142.

Part 4: Paying Extra

Assuming instead of the original $952.84 monthly payment, an extra $100 was paid each month, the

loan would be paid off more quickly. Using $1,052.84 as d* in this formula, the goal is to find out how

many years N it would take to pay off this loan. Paying more per month would certainly pay the loan

down more quickly and it would take less than 30 years.

 Reflective Writing – Mortgage Project
By: Jacob Anderson

Part 5:

I think this project shows how math can be applied to the real world. When buying a
house, it is important to know how much you will be spending before you decide to
make the purchase. The results of this exercise are beneficial because they take into
account the expense that interest adds to the loan value.

An example of another application where this type of analysis would be beneficial is

considering a car loan. Auto loans are just like mortgages – it’s a big purchase which
requires careful consideration before making a final decision. The cost of a car is more
expensive when interest is added to a loan.

If I were a mortgage broker, it would be important to be able to explain the details of

this project to clients because they need to know about compound interest. Home
buyers need to know that the amount they will be paying over the life of the loan is
much more than the original purchase price. Educating homebuyers is important so
they’ll understand where their money is going.

There are differences between the 30-year, 15 year, and 30 years with extra payment
plans and there are "pros and cons" of each. With a 30-year loan, the pro is that the
monthly payment is reasonable for a budget to allow more money to be spent on
things other than the mortgage. The con is that it takes a very long time to pay off. With
a 15-year loan, the payments and interest rates are higher which is a con, but the pro is
that the loan is paid off in half the time of a 30-year loan. The pro of a 30-year loan with
extra payments is that it will be paid down faster, but the con is that the monthly
payments are higher and don’t allow much extra money in a monthly budget to spend
on things other than the mortgage.

This assignment changed my opinion of the usefulness of math. I now see where these
formulas can be applied in real world situations such as a home loan or a car loan. I
can see how these ideas would be beneficial because it’s important to know how
interest works and helps you fully understand what you are getting into when you take
out a loan. I see why it’s important to understand these equations and shop around for
good interest rates.