Should Wally Choose a 15-Year Mortgage Over a 30-Year Mortgage to Save Money?
How much would Wally save in interest expense if he chose a 15-year mortgage instead of a 30-year mortgage?
A. $576,000
Wally's Potential Savings by Choosing a 15-Year Mortgage
Wally Bee purchased a new home for $750,000 with a $110,000 down payment and financed the remainder with a 6% mortgage for 30 years. It was stated that Wally would save $576,000 in interest expense by opting for a 15-year mortgage instead of a 30-year mortgage.
In order to calculate the amount Wally would save in interest expense by choosing a 15-year mortgage instead of a 30-year mortgage, we need to compare the total interest paid over each mortgage term.
First, we determine the loan amount for both scenarios. With the original home price being $750,000 and the down payment being $110,000, the loan amount for both the 30-year and 15-year mortgages would be $640,000.
Next, we calculate the total interest paid for each mortgage term. For the 30-year mortgage with a 6% interest rate, the total interest paid would be $1,152,000. On the other hand, for the 15-year mortgage with the same 6% interest rate, the total interest paid would amount to $576,000.
Subtracting the total interest paid for the 15-year mortgage from the total interest paid for the 30-year mortgage gives us the amount Wally would save in interest expense by choosing the shorter mortgage term: $1,152,000 - $576,000 = $576,000.