2. Suppose you wish to purchase a home while putting a 20% down payment on the h

Question

2. Suppose you wish to purchase a home while putting a 20% down payment on the home and financing the rest of the house payment with a mortgage. Which of the following scenarios would result in you paying the least amount of money after you payed off the home, assuming you make regular monthly payments throughout the life of the loan.

a. 30 year fixed rate morgage with an annual interest rate of 4.25% b. 20 year fixed rate morgage with an annual interest rate of 4.25% c. 15 year fixed rate morgage with an annual interest rate of 4.15% d. 10 year fixed rate morgage with an annual interest rate of 4.15%

Explanation / Answer

Here in the given options we have 4 types of term periods are there.

so when we choose long term like 30 years then the monthly payment will become low but the interest what we need to pay for 30 years will be very high.Why because when we are paying low monthly payment then in the amortization schedule the principal part reduced very less part and interest part become high.

ex: suppose lets assume the principal amount $100000 and interest is 4.25%. Period is 30years

so the monthly will become only $492 permonth.

so total payment = 492 x 360 = 177120

so interest part is $177120 - $100000 = $77120.

now lets take a perion for only 10 years with same interest rate

the monthly payment = $1024

total payment = 120 x 1024 = $122880

and interest part = $122880 - $100000 = $22880.

so when the term period is low then the interest also low and when the term period is high then interest part also will be high.

so from the given information option D will be best choise irrespective of any principal amount.

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