Description
1-With regard to this module’s discussion activity, the home I selected to complete the assignment is a local one I came across on Zillow on the other side of the county in an older, established subdivision. When looking for a house to complete the activity, this listing stood out to me particularly because some of the images had snow which typically is not common in this region – although in February of 2021 we got anywhere from 2-6 inches of snow and the county was shut down for nearly a week! This home – although beautiful – is listed at a hefty price of $825,000, and assuming that I put down a 20% down payment of $165,000, I would still owe or have a loan amount for approximately $660,000.
In paying the loan at the current 7.44% interest rate over 360 months, I would end up paying approximately $991,582.79 in total interest for the duration of the loan – that of which genuinely surprised me with regard to this total interest amount being greater than the loan itself. In changing some of the parameters, I decided to change the current interest rate to that of the previous 3% rate, resulting in a total interest amount of $341,731.18 instead. Lastly, I changed the amount of the percentage put down for the home, assuming I was only able to put 10% down instead, the loan amount became $742,000 meaning the total interest jumped back up to a little over $1,000,000.
Therefore, I believe this is useful demonstrating that it is most definitely in a homebuyer’s best interest to put a greater amount down – when possible – in purchasing a home, although other factors like current interest rates could still impact price (The Pros And Cons, 2021).
2-A dream house of mine is located in Reading, Massachusetts. It’s tough to find a picture of the house, because it was recently built but it’s absolutely beautiful and just down the street from my parents’ house. The Zestimate (estimate provided by Zillow) for the property is $2,086,000. With the mortgage parameters described in the prompt, I would end up paying more in interest over the life of the mortgage than the house is currently worth! That is $2,340,236.03 in interest to be exact. Of course, this is not the best time in history to buy a house, but that is an unbelievable amount of interest. Considering the limitations in place on deducting mortgage interest on a person’s tax return, the holder of this hypothetical mortgage would not be able to enjoy a dollar-for-dollar benefit despite the immense amount of money being paid towards interest.
The first variable I adjusted was moving the interest rate from 7.03% to 3%, so I could imagine myself as one of homebuyers who bought a house during COVID and locked in a 3% rate for the life of their mortgage. This reduced the total interest paid significantly, leaving interest paid over the life of the loan at $864,062.12. This is not chump change by any means but is only 36.92% of the original interest figure at a 7.03% interest rate. Next, I adjusted the down payment down from 20% to 10%. With less money down, the total interest paid over the life of the mortgage increases and the annual payments increase. Less money down means more money borrowed, which means more of a loan accruing interest. For a long time, it seemed like 20% down was the standard, but I’m reading that now the average down payment is only 7% (Bundrick & Marquand, 2021). This means that more and more homebuyers are saddling themselves with significantly more borrowed money and interest than they historically have.
3-The house I chose is in Miami, Florida which is selling for 1,600,000. I calculated the twenty percent down payment of 320,000 dollars, which means I would have a loan amount of 1,280,000 dollars. Right now, the current interest rate is 7.03%, according to FRED. The type of loan would be a 30-year fixed mortgage with a total of 360 payments. The total interest for the entire loan duration would be 1,795,003.66 dollars. I had to double check that when I calculated it because I could not believe I would be paying more in interest than what the actual loan would be.
If the interest rate was changed to a more realistic rate, before recent changes, to 3 percent; the total interest paid at the end of the mortgage term would be 569,551.97 dollars with 500,000 dollars as a down payment. Putting more money into the down payment lowered the amount owed, and with a lower interest rate brought the total amount of interest over time over a million dollars. Everything I have heard from the rising mortgage rates indicates that it should be lowering soon, this will help out many people in the home buying process.
