Question

If John wants to purchase a new home for $300,000 and finance $220,000 with either a 4.%, 30- year mortgage or a 3.5%, 15-year mortgage.

a. What is the monthly payment on each of the above alternatives?

b. How much interest would be paid in the first 12 payments for each of the above alternatives?

c. What would the loan balance be after 10 years for each of the above alternatives?

Answer 1

a)

The monthly on each of the alternative is found using the following equation

When the interest rate is 4% and a mortgage for 30 years.

Monthly payment = $ 1050.31

When the interest rate is 3.5% and a mortgage for 15 years.

Monthly payment = $ 1572.74

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b) The interest paid in the first 12 months is found by doing an amortization schedule using excel.

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c)

The balance for each of the above alternatives is calculated as follows

Balance after 10 years = $ 173,325.25

The balance on the 3.5% , 15 year mortgage is calculated as

Balance after 10 years = $ 86,453.81