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Calculate the amount of interest paid for each option and how much does the buyer save...
Calculate the amount of interest paid for each option and how much does the buyer save with the 20 year option in the following case:
The price of small cabin is 50000. The banks require 5% down payment and the buyer is offered two mortgage options: 20 years fixed at 9.5% or 30 years fixed at 9.5%.
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The formula for the monthly payment to be made for a mortgage is given by `M = (P*r*(1 + r)^N)/((1+r)^N - 1)` where r is the monthly rate of interest, N is the tenure in terms of number of months and P is the principle amount. The total interest paid is M*N - P.
It is given that the cabin costs $50000 with a 5% down payment. The mortgage is for $47500.
For the first option with a tenure of 20 years and the interest rate of 9.5%, `M = (47500*(.095/12)*(1+.095/12)^240)/((1+.095/12)^240 - 1)` = 442.76. The total interest paid is 442.76*240 - 47500 = 58762.95
For the second option with a tenure of 30 years and the interest rate of 9.5%, `M = (47500*(.095/12)*(1+.095/12)^360)/((1+.095/12)^360 - 1)` = 399.40. The total interest paid is 399.4*360 - 47500 = 96286.06
With the 20 year mortgage the buyer saves $37523.11
Posted by justaguide on November 27, 2012 at 1:52 PM (Answer #1)
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