You are buying a house and trying to decide how to structure a the loan.

You are buying a house and trying to decide how to structure a the loan. You can borrow $120,000 at a 4.5 percent rate for 30 years with monthly payments, or you can borrow $120,000 at a 3.75 rate for 20 years with monthly payments. what should you consider when making this decision?

Expert Solution

Loan 1:

PV = $120,000
Nper = 30 * 12 = 360
Rate = 4.5% / 12 = 0.375%
FV = 0

Monthly payment can be calculated by using the following excel formula:
=PMT(rate,nper,pv,fv)
=PMT(0.375%,360,-120000,0)
= $608.02

Total payments = Monthly payments * Number of months
= $608.02 * 360
= $218,888.05

Total payments = $218,888.05

Loan 2:

PV = $120,000
Nper = 20 * 12 = 240
Rate = 3.75% / 12 = 0.3125%
FV = 0

Monthly payment can be calculated by using the following excel formula:
=PMT(rate,nper,pv,fv)
=PMT(0.3125%,240,-120000,0)
= $711.47

Total payments = Monthly payments * Number of months
= $711.47 * 240
= $170,751.83

Total payments = $170,751.83

You should consider the total payments on the loan when making this decision. In this case, the total payments on first loan is greater than the second loan. Thus, choose the second loan option.

jeff jeffy answered 2 years ago

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