Should Wally Switch to a 15-Year Mortgage? Let's Find Out!
The Complete Question:
Wally Bee purchased a new home for $600,000 with a $100,000 down payment. He financed the remainder with a 3% mortgage for 30 years. If Wally had originally planned on using a 15-year mortgage (also at 3%), how much would Wally save in interest expense compared to the 30-year mortgage?
A. $121,690
B. $225,000
C. $148,327
D. $157,922
Answer:
To determine the interest savings from switching to a 15-year mortgage from a 30-year mortgage, we need to calculate the total interest costs for both mortgage terms.
Wally Bee purchased a new home for $600,000 with a $100,000 down payment and financed the remainder with a 3% mortgage for 30 years. If he had chosen a 15-year mortgage instead, the interest savings would have been significant.
Let's break down the calculation:
For the 30-year mortgage:Loan amount = $600,000 - $100,000 (down payment) = $500,000
Interest rate = 3%
Loan term = 30 years
Total interest expense for 30-year mortgage = $500,000 × (3/100) × 30 = $450,000
For the 15-year mortgage:Loan amount = $500,000
Interest rate = 3%
Loan term = 15 years
Total interest expense for 15-year mortgage = $500,000 × (3/100) × 15 = $225,000
By subtracting the total interest expense of the 15-year mortgage from the 30-year mortgage, we find the interest savings: $450,000 - $225,000 = $225,000. Therefore, Wally would save $225,000 in interest costs by choosing a 15-year mortgage over a 30-year mortgage.