Question

-13 points TanFin11 5.3.054 My Notes Ask Your Tea The Martinezes are planning to refinance their home. The outstanding balance on their original loan is $150,000. Their finance company has offered them two options. (Assume there are no additional finance charges. Round your answers to the nearest cent.) Option A: A fixed-rate mortgage at an interest rate of 2.5%/year compounded monthly, payable over a 30-year period in 360 equal monthly installments Option B: A fixed-rate mortgage at an interest rate of 2.25%/year compounded monthly, payable over a 12-year period in 144 equal monthly installment (a) Find the monthly payment required to amortize each of these loans over the life of the loan option A$ option B (b) How much interest would the Martinezes save if they chose the 12-year mortgage instead of the 30-year mortgage?

Answer 1

Loan Amount = $150,000

In Option A,

Interest Rate = 2.50%

Time Period = 30 years

Calculating Monthly Payment,

Using TVM Calculation,

PMT = [FV = 0, PV = 150,000, T = 360, I = 0.025/12]

Monthly Payment = $592.68

Total Interest Paid = 360(592.68) - 150,000 = $63,364.80

In Option B,

Interest Rate = 2.25%

Time Period = 12 years

Calculating Monthly Payment,

Using TVM Calculation,

PMT = [FV = 0, PV = 150,000, T = 144, I = 0.0225/12]

Monthly Payment = $1189.58

Total Interest Paid = 144(1189.58) - 150,000 = $21,299.52

Total Interest Saved in Option B = 63,364.80 - 21,299.52

Total Interest Saved in Option B =$42,065.28