Karly Gallis

Mrs.Tallman
PreCalc 11B
25 March 2013
Using Spreadsheets for Financial Decisions: Fixed Mortgage
A mortgage is a conveyance of an interest in property as security for the repayment of
money borrowed (Dictionary.com). A mortgage is most commonly used when purchasing
houses as either a fixed or interest only loans. A fixed mortgage is set up with a fixed monthly
payment for a certain amount of time (usually 15 or 30 years) and has an interest rate for the
bank. Every month, the interest and principal, the amount of money actually going towards
paying off the loan, are recalculated. This is called amortization (Bye). When the loan first
begins, most of the money paid in the monthly payment will go towards the interest. However,
towards the end of the loan almost all of it will go towards the loans principal.
For this example, $100,000 will be borrowed initially. It will then be paid off using a 30-
year fixed rate of 3.92%, and in a 15-year fixed rate of 3.16%. These are the national rates as of
March, 2012.
In this scenario, first for the 30-year plan, there is monthly payment of $472.81. This
payment was calculated using Figure 1. The monthly payment calculated for the 15-year plan is
$698.30.


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Figure 1. Payment equation
Figure 1 shows the equation used to find the monthly equation. In this scenario, the
amount borrowed is $100,000, the monthly rate is .00327 (the yearly rate divided by 12), and the
total number of payments is 360 (12 payments per year for 30 years).
Due to the interest placed on the loan, there is not a constant principal amount paid each
month towards the loan. It begins at $146.15 for the first month, but by the end of the 360
months it is raised to $471.28 almost the full monthly payment. Each month, 3.92% of the
unpaid balance is paid in interest to the bank. The remaining money from the $472.81 goes
towards actually paying off the loan. As the unpaid balance decreases, so does the interest
payment. This means more money each month goes towards paying off the loan.

Figure 2. Loan Amortization Chart (creditkarma.com)
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Figure 2 shows the rate of change for total principal and interest paid on the loan. Over
time, the interest curve slows as less interest is paid each month, while the principal and balance
curves grow as more principal is paid each month.
From the spreadsheet, we can sum the interest column to find that the total interest paid
over the 30 years of the loan is $70,213.30, and the total of all payments was $170,213.30.
Using the same formula, we recalculated the loan using the 3.61% interest rate for 15
years. Because of the shorter loan duration, the monthly payment increases to $698.30. However,
the principal paid with the first payment nearly triples to $438.97, while the interest amount is
19% lower. ($263.33 instead of $326.67). After 15 years, the total interest paid is $25,694.50,
and total payments are $125,694.50.
By choosing the 15 year mortgage, a borrower can save $44,518.80 in interest payments
to the bank. The tradeoff is the higher payment amount ($698.30 vs. $472.81) per month, which
many borrowers may find difficult to afford. The initial $100,000 is paid off much more quickly
so the bank doesnt have as long to gain interest, and the interest percentage is lower to begin
with (3.16% vs. 3.92%).
This product taught me a lot about making good financial decisions. Before, all I knew
about a mortgage is that its how you pay for your house. I now know how a fixed mortgage
works, and that the shorter the length of the fixed mortgage, the better. I was astounded at how
much interest was paid. For the 30-year mortgage, an additional $70,000 was paid back to the
bank. Thats 2/3 of the initial loan! Its especially deceiving because 3% seems like such a small
amount to pay each month, but when the loan is worth $100,000, the interest for the first month
is $300! These decisions are extremely important when purchasing a house because it will save
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you thousands of dollars. If you are able to make higher payments each month, it is definitely
worth it in the end. I can use this when I am buying a house of my own someday, even though
there are many financial programs that calculate this for you. As a productive, intelligent
member of society, it is important to understand everything so you are not tricked into making
foolish decisions.













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Works Cited
"Amortization Calculator." Credit Karma. N.p., n.d. Web. 25 Mar. 2013.
<https://beta.creditkarma.com/calculators/amortization>.
Bye, Dale. "How a 30-Year Mortgage Works." EHow. Demand Media, 17 Oct. 2010. Web. 25
Mar. 2013. <http://www.ehow.com/about_7353432_30_year-mortgage-works.html>.
"Loan Amortization." Credit Karma. N.p., n.d. Web. 25 Mar. 2013.
<https://www.creditkarma.com/savings/mortgages>.
"Mortgage." Dictionary.com. Dictionary.com, n.d. Web. 25 Mar. 2013.
<http://dictionary.reference.com/browse/mortgage>.
"Types of Mortgages." Nationwide Insurance. N.p., n.d. Web. 25 Mar. 2013.
<http://www.nationwide.com/bank-types-of-mortgages.jsp>.