Question

(CO B) Ms. Towne is buying a home for $250,000 and is putting down 20% cash on the purchase. She is financing the rest with a 30-year, fixed rate mortgage with a rate of 4.625% but is considering an option that would allow her to make biweekly payments. How much interest would the biweekly payment option allow her to save over the life of the loan and how long would it take to pay off the loan?

Answer 1

$44,330; 21.14 years

Explanation:

Cost of home = $250,000

Borrowing = 250000 * (1 - 20%) = $200,000

Monthly Interest rate = 4.625% / 12

Tenure = 30 years = 30 * 12 = 360 months

Monthly Payment:

To get monthly payments we will use PMT function of excel:

= PMT (rate, nper, pv, fv, type)

= PMT (4.625%/ 12, 360, -200000, 0, 0)

= $1028.2790

Monthly payment = $1028.2790

Interest payment over life of loan = Monthly payments * Number of months - Loan amount

= 1028.2790 * 360 - 200000

= $170,180

Interest payment over life of loan = $170,180

Now, when biweekly repayment option is considered:

Biweekly payment = 1028.2790 / 2 = $514.1395

Biweekly rate of interest = 4.625% / 26

To get long would it take her to pay off the loan with this option, we will use NPER function of excel:

= NPER (rate, pmt, pv, fv, type)

= NPER (4.625%/26, 514.1395, -200000, 0, 0)

= 662.5676 biweekly periods

In number of years = 662.5676/ 26 = 25.48years

Interest payment over life of loan = 662.5676 * 514.1395 - 200000 = $140,652

Interest amount that the bi-weekly option would allow her to save = $170,180 - $140,652 = $29,528

Interest amount that the bi-weekly option would allow her to save = $29,528