Hello Professor and Class,
Compare the total payback for a $100,000, 5%, 15 year mortgage and a $100,000, 5%, 30 year
mortgage.
A 15 year mortgage ($100,000 x 5%) = $142,343 over the life of the loan. Payments will be
$791 for the borrower.
A 30 Year mortgage ($100,000 x 5%) = $193,256 over the life of the loan. Payments will be
$537 monthly for the borrower.
As a new homeowner, this concept always puzzled me since paying less seemed to be the
affordable option based on my finances. However, taking a long-term fixed rate loan (30 years)
meant that I would pay more over a longer period of time at a higher interest rate and a lower
payment. Taking a short-term fixed rate loan (15 years) meant that I would pay less over a
shorter period of time at a lower interest rate at a higher payment. This 15 year mortgage
allows me to pay off the principle faster versus the 30 year mortgage.
Total cost savings versus taking a 15 year mortgage versus a 30 year mortgage:
Life of the loan: $50,913.00 (HUGE SAVINGS)
Give an example of how your newly acquired knowledge of Time Value of Money (TVM)
calculations could better prepare you for the next negotiation or big-ticket purchase in your life.
Time value of money (TVM) In simpler terms, it would be safe to say that a dollar was worth
more yesterday than today and a dollar today is worth more than a dollar tomorrow. With TVM,
the approach is centered around how much an individual is willing to risk, or what return they
are expecting. Risk and return say that if you are to risk a dollar, you expect gains of more than
just your dollar back. For each unit of risk you take on, you expect a slightly more significant
unit of return.
Student
Source: https://www.listenmoneymatters.com/time-value-of-money/
Financial Calculators
https://www.msn.com/en-us/money/tools/timevalueofmoney
https://www.omnicalculator.com/finance/time-value-of-money
https://www.calculator.net/finance-calculator.html
http://www.fncalculator.com/financialcalculator?type=tvmCalculator