The price of a small cabin is $35,000. The bank requires a 5% down payment. The buyer is offered two mortgage options: 20-year fixed at 7.5% or 30-year fixed at 7.5%. Calculate the amount of interest paid for each option. How much does the buyer save in interest with the 20-year option?

Answer 1

20-year fixed:
P = Po*r*t/(-(1+r)^-t).

Po = 35000*0.95 = $33,250.

r = (7.5%/12)/100% = 0.00625 = Monthly %rate expressed as a decimal.

t = 20yrs. * 12mo./yr. = 240 Months.

P1 = 33,250*0.00625/(1-1.00625^-240) =
$64,286.34.

I = P1-Po=64,286.34-33,250=$31,036.34.

30-year fixed:
Use same procedure as 20-year fixed.