Question

Using the TOOLS function calculate the total amount you would save over the life of the loan, by taking a 15-year mortgage instead of a 30-year mortgage. Assume a $300,000 loan with an interest rate of 4%, aand that your marginal rate of tax is 22%, for both loans.

a.  $116,175

b.  $144,167.

c.  $787.

d.  None of the above.

Answer 1

As per given details total saving on interest after considering marginal tax is 140,400. Hence option D is correct as None of the above. Please refer below calculation for detail.As no clear instruction about we have considered interest rate is flat through out the loan period.

Loan Amount	Number of Years	Interest Rate
300000	15	4
Yearly Interest	12,000.00	Loan amount * Interest rate / 100
Total Interest Paid (A)	180,000.00	Yearly Interest * number of years
Loan Amount	Number of Years	Interest Rate
300000	30	4
Yearly Interest	12,000.00	Loan amount * Interest rate / 100
Total Interest (B)	360,000.00	Yearly Interest * number of years
Saving on Interest (1)	180,000.00	B - A
Marginal tax on saved Interest (2)	39,600.00	Saving on Interest * Marginal Tax Rate / 100
Net Saving	140,400.00	Point 1 - Point 2

As per calculation there are for loan period 15 years total interest paid as 180,000 and for 30 years total interest paid as 360,000.Gross saving on interest is 180,000. Marginal tax on interest saved is 39,600. After deduction tax amount net saving on interest is 140,400.