Question

Maria and John have been married for 2 years and just learned that they are pregnant. They have been renting a small apartment but decide to purchase a house. They find one that is selling for $375,000. They decide to make a 20% down payment They are considering 2 financing options: Option 1: a 3.4% interest 30-year mortgage: Option 2: a 2.9% interest 15-year mortgage: Answer the following questions showing all your work to reach each answer. A. Which option will result in a lower monthly payment if they take the full term of the mortgage? B. Which option will result in the most total interest if they take the full term of the mortgage?

Answer 1

Hi

A - Option 1 will result in lower monthly payment as the term of loan in Option 1 is higher than the Option 2. Also, the interest rate is lower in Option 1.

B - Since, the term of Option 2 is lower and interest rate is lower, Option 2 will have the lower total interest.

в $375,000.00 20% $300,000.00 A 1 Cost of house 2 Down payment 3 Loan 4 5 6 Interest 7 Term 8 9 Monthly payment 10 11 Total payments 12 13 Total interest 1 Option 1 3.40% 30 Option 2 2.90% 15 $1,330.44 $2,057.35 $478,959.73 $370,322.47 $178,959.73 $70,322.47

With formulae-

5 0.029 A 1 Cost of house 375000 2 Down payment 0.2 3 Loan =B1*(1-B2) 4 Option 1 Option 2 6 Interest 0.034 7 Term 8 9 Monthly payment =PMT(B6/12,87*12,-B3) =PMT(C6/12,c7*12,-B3) 10 11 Total payments =B9*B7*12 =C9*07*12 12 13 Total interest =B11-B3 =C11-B3 14