Question

In: Finance

Mortgage lenders base the mortgage interest rate they offer you on your credit rating. This makes...

Mortgage lenders base the mortgage interest rate they offer you on your credit rating. This makes it financially critical to maintain a credit score of 740 or higher. How much more interest would you pay on a $207,000 home if you put 20% down and financed the remaining with a 30-year mortgage at 6% interest compared to a 30-year mortgage at 3.5% interest? (Do not round intermediate calculations. Round your answer to the nearest cent.)

Solutions

Expert Solution

Loan amount (207000*80%)
Loan amount $165,600
Monthly payments Loan value/((1-(1+r^-n)/r)
r is monthly interest rate and n is number of payments
r = 6%/12 = 0.005
n = 360 (30*12)
Monthly payments 165600/((1-(1.005^-360)/0.005)
Monthly payments 165600/166.7916
Monthly payments $992.86
Total payment paid 992.86*360
Total payment paid $357,429.60
Interest on loan 357429.60-165600
Interest on loan $191,829.60
Monthly payment with interest rate of 3.5%
r = 3.5%/12 = 0.2917%
n = 360 (30*12)
Monthly payments 165600/((1-(1.002917^-360)/0.002917)
Monthly payments 165600/222.694985
Monthly payments $743.62
Total payment paid 743.62*360
Total payment paid $267,702.48
Interest on loan 267702.48-165600
Interest on loan $102,102.48
Extra interest paid on 6% mortgage 191829.60-102102.48
Extra interest paid on 6% mortgage $89,727
Thus, $89,727 more interest is paid under 6% mortgage as compared to 3.5%

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