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Fixed Rate Mortgage VS Interest Only Option

Fixed Rate Mortgage VS Interest Only Option. Team 4 Matthew Dwight Toan Duong Shane Carlson. Scenario #1: Fixed Rate Mortgage. $300,000 Home Down Payment: $30000 5.70% Fixed Rate 30 years of paying the same payment - $18990/year. Scenario #2: Interest Only Option.

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Fixed Rate Mortgage VS Interest Only Option

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  1. Fixed Rate MortgageVS Interest Only Option Team 4 Matthew Dwight Toan Duong Shane Carlson

  2. Scenario #1: Fixed Rate Mortgage • $300,000 Home • Down Payment: $30000 • 5.70% Fixed Rate • 30 years of paying the same payment - $18990/year

  3. Scenario #2: Interest Only Option • Same as Scenario #1 except: • First 10 Years –Interest Only – $15390/year • Last 20 Years – Fixed Rate Loan - $22970/year

  4. Constants in Scenarios • Fixed Output – Minimize Input • Salary is estimated to be $55k/year + 3% each year for tax calculation • Assuming house averages 9%/year return average over 30 years. • House Future Value = ~ 4 Million. • Tax breaks according to current federal law

  5. Tax Breaks • Incremental Tax Structure • Taxable Income<$7500 a year • 10% Tax • $7500<Taxable Income<$29700 • $750 plus 15% over $7500 • … and so on. • Mortgage Loan Interest Tax Break • Taxable Income = Income – Interest On Mortgage • More Income Means Better Mortgage Tax Break

  6. Comparative Tax Break Interest Only Mortgage has $13700 more in tax savings

  7. Net Present Worth Analysis Difference: ~$11000 Difference: ~$9000

  8. Net Present Worth Analysis

  9. SensitivityTo Salary Change

  10. Sensitivity To Interest Rate Change

  11. Conclusion • Interest only options are economically reasonable • Depends heavily on Minimum Acceptable Rate of Return. • As salary goes up, interest only is better. • As interest rates go up, fixed rate gets better. • Very sensitive to government tax breaks

  12. References • www.bankrank.com • www.interestonlyloans.com • www.eloan.com

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