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Assume that a family is purchasing a typical house by making a $30,000 down payment and then financing a $280,000 mortgage at an annual interest rate of 6.25% (a typical rate for a 30-year loan). The size of their monthly payment will depend on the term of the mortgage.
The formula Discussion Mortgages 15-year vs. 30-year Formula 1.PNG or the Excel function “pmt” can be used to compute these monthly mortgage payments. If using Excel the 3 arguments of function “pmt” are:

Rate (the monthly interest rate): 0.0625/12

Nper (the total number of monthly payments) and

Pv (the mortgage amount)

Find the monthly payments if the $280,000 was financed over 15 years.
Find the monthly payments if the $280,000 was financed over 30 years.
Multiply your answer to part (a) by the number of payments to find how much the family would need to pay in total over the life of the 15-year loan. Subtract the principal amount from this to give the amount of interest paid over the life of the loan.
Multiply your answer to part (b) by the number of payments to find how much the family would need to pay in total over the life of the 30-year loan. Subtract the principal amount from this to give the amount of interest paid over the life of the loan.
A standard rule for lenders is that a family’s house payment should not exceed 28% of their monthly income. For a family making $6500 per month, this would equate to $1820 per month. Assuming monthly costs of $350 for property tax and homeowner’s insurance, this would allow for a $1470 monthly mortgage payment.
The formula Discussion Mortgages 15-year vs. 30-year Formula 2.PNG or the Excel function “pv” can be used to compute the mortgage a family could afford. If using Excel the 3 arguments of function “pv” are:

Rate (the monthly interest rate): 0.0625/12

Nper (the total number of monthly payments) and

Pmt (the monthly mortgage amount)

Assuming that a family wants to make a $1470 monthly payment, give the mortgage that a family could afford at an annual interest rate 6.25% for a 15-year mortgage.
Assuming that a family wants to make a $1470 monthly payment, give the mortgage that a family could afford at an annual interest rate 6.25% for a 30-year mortgage.
Based on your answers to questions 1 and 2, what is the advantage of having a 15-year mortgage, and what is the advantage of having a 30-year mortgage? Which option do you think is wiser?
Proverbs 22:7 says, “The rich rules over the poor, and the borrower is the slave of the lender.” In light of this verse, and the Bible’s more general teaching on debt, many Christians have counseled that incurring excessive debt is undesirable. As financial expert Dave Ramsey puts it: “If you must take out a mortgage, pretend only 15-year mortgages exist.” Discuss how you would apply the Bible’s warning about borrowing when deciding how to go about purchasing a home. Does the Bible prohibit any kind of borrowing? Does it influence which type of mortgage is more attractive? Or does it not really apply to this type of loan?

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Let’s break down this mortgage scenario and connect it to the biblical perspective on debt.

1. Monthly Payments for a 15-Year Mortgage:

  • Rate: 0.0625 / 12 = 0.00520833
  • Nper: 15 years * 12 months/year = 180 months
  • Pv: $280,000
  • Using the PMT function or formula: Monthly Payment = $2,408.06 (approximately)

2. Monthly Payments for a 30-Year Mortgage:

  • Rate: 0.0625 / 12 = 0.00520833
  • Nper: 30 years * 12 months/year = 360 months
  • Pv: $280,000
  • Using the PMT function or formula: Monthly Payment = $1,723.11 (approximately)

3. Total Payment and Interest (15-Year Loan):

  • Total Payment: $2,408.06 * 180 = $433,450.80
  • Total Interest: $433,450.80 – $280,000 = $153,450.80

4. Total Payment and Interest (30-Year Loan):

  • Total Payment: $1,723.11 * 360 = $620,319.60
  • Total Interest: $620,319.60 – $280,000 = $340,319.60

5. Mortgage Affordability (15-Year Loan):

  • Rate: 0.0625 / 12 = 0.00520833
  • Nper: 180 months
  • Pmt: $1,470
  • Using the PV function or formula: Mortgage Affordability = $199,445.69 (approximately)

6. Mortgage Affordability (30-Year Loan):

  • Rate: 0.0625 / 12 = 0.00520833
  • Nper: 360 months
  • Pmt: $1,470
  • Using the PV function or formula: Mortgage Affordability = $228,879.17 (approximately)

7. Advantages of 15-Year vs. 30-Year Mortgage:

  • 15-Year Advantage:
    • Significantly lower total interest paid over the life of the loan.
    • Faster equity buildup in the home.
    • Shorter period of indebtedness.
  • 30-Year Advantage:
    • Lower monthly payments, making it more affordable in the short term.
    • Provides greater financial flexibility for other expenses or investments.
  • Which is wiser?
    • From a purely financial perspective, the 15-year mortgage is generally considered wiser due to the substantial savings in interest. However, affordability and individual financial circumstances play a significant role. If a 15-year mortgage is simply not affordable, a 30 year mortgage is the only option that allows home ownership.

8. Biblical Perspective on Debt:

  • Proverbs 22:7 and General Teaching:
    • The Bible cautions against excessive debt, emphasizing the potential for bondage and loss of freedom.
    • It promotes financial prudence, responsible stewardship, and avoiding unnecessary risks.
    • However, the Bible does not explicitly prohibit all forms of borrowing.
  • Application to Home Purchase:
    • When deciding on a home purchase, Christians should carefully consider the financial implications and avoid taking on more debt than they can comfortably manage.
    • The 15-year mortgage aligns more closely with the biblical emphasis on minimizing debt and avoiding long-term financial burdens.
    • However, the Bible also emphasizes providing for one’s family. If a 30-year mortgage is the only way to obtain shelter, that would be acceptable.
    • It is important to consider the heart behind the borrowing. Is it for greed, or for a need.
    • The principle of being a good steward of resources would encourage careful planning, budgeting, and seeking wise counsel before taking on a mortgage.

In conclusion, while the 15-year mortgage is generally more favorable from a financial and biblical perspective, individual circumstances and careful consideration are essential.

 

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