The Martinezes are planning to refinance their home (assuming that there are no
ID: 3231801 • Letter: T
Question
The Martinezes are planning to refinance their home (assuming that there are no additional finance charges). The outstanding balance on their original loan is $200,000. Their finance company has offered them two options: Option A: A fixed-rate mortgage at an interest rate of 6.5% per year compounded monthly, payable over a 25-year period in 300 equal monthly installments. Option B: A fixed-rate mortgage at an interest rate of 6.25% per year compounded monthly, payable over a 12-year period in 144 equal monthly installments. (a) Find the monthly payment required to amortize each of these loans over the life of the loan. (Round your answers to the nearest cent.) (b) How much interest would the Martinezes save if they chose the 12-year mortgage instead of the 25-year mortgage?Explanation / Answer
option A
Present value of loan (PV) =$200000
Rate = 4.5%/12 =0.52% (0.5167%)
Npr =300
monthly paying amount =PMT(0.5167%,300,(-200000)) from the excel)
=$1313.21
Total payments = Npr * monthly payments
=300*1313.21
=$393964.06
minus principle =-$200000
total interest =$ 193964.06
=$193964
option B
Present value of loan (PV) =$200000
Rate = 4.5%/12 =0.52% (0.5208%)
Npr =144
monthly paying amount =PMT(0.5208%,144,(-200000)) from the excel)
=$1977.63
Total payments = Npr * monthly payments
=144*1977.63
=$284778.98
minus principle =-$200000
total interest =$ 84778.98
=$84779
Saved amount =$ 193964.06 - $ 84778.98
=$109185.0766
=$109185
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