Fixed Rate Mortgage VS Interest Only Option

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Fixed Rate MortgageVS Interest Only Option

• Team 4
• Matthew Dwight
• Toan Duong
• Shane Carlson

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Scenario 1 Fixed Rate Mortgage

• 300,000 Home
• Down Payment 30000
• 5.70 Fixed Rate
• 30 years of paying the same payment - 18990/year

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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

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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

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Tax Breaks

• Incremental Tax Structure
• Taxable Incomelt7500 a year
• 10 Tax
• 7500ltTaxable Incomelt29700
• 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

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Comparative Tax Break
Interest Only Mortgage has 13700 more in tax
savings
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Net Present Worth Analysis
Difference 11000
Difference 9000
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Net Present Worth Analysis
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Sensitivity To Salary Change
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Sensitivity To Interest Rate Change
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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

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References

• www.bankrank.com
• www.interestonlyloans.com
• www.eloan.com