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# Alan and Barbara are in the process of purchasing their first

Alan and Barbara are in the process of purchasing their first home. However, they cannot decide whether a 15-year fixed rate mortgage or a 30-year fixed rate mortgage is best for them. they have decided to finance \$200,000 and can get the 15-year mortgage at 4.5% and the 30-year mortgage at 5%.

Calculate the monthly payment of each loan.

Discuss the pros and cons of a 15-year mortgage versus a 30-year mortgage.

The 15 year note is \$1,529.99 per month
The 30 year note is \$1,013.37 per month

The pros of having a 15 year mortgage is you pay less interest over the life o f the loan, and your house is paid off quicker. The cons are the payment is larger so you have less cash flow each month. Also you will have less monthly interest so your mortgage interest deduction will be lower.

The pros of having a 30 year mortgage are that you will pay more interest, therefore you will be able to deduct more interest expense on your tax return. You also have a lower monthly payment, so your monthly cash flow is greater. The cons to having a 30 year mortgage are that it takes longer to pay off the loan, and you pay a lot more interest over the life of the loan than you would a 15 year note.

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Customer: replied 4 years ago.

P = (Pv*R) / [1 - (1 + R)^(-n)]

1529.99 = (200,000*(4.5%/12)) / [1-(1+4.5%)^180]
1,037.37 = (200,000*(4.5%/12)) / [1-(1+4.5%)^360]

Or, in Excel you can type the following formula:

=pmt(.045/12,180,-200,000)
=pmt(.045/12,360,-200,000)

Thanks!

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