Question

Compare the monthly payments and total loan costs for the following pairs of loan options. Assume that both loans are fixed rate and have the same closing costs. You need a $30,000 loan. Option 1 : a 30-year loan at an APR of 5.65%. Option 2: a 15-year loan at an APR of 5.25%. Find the monthly payment for each option The monthly payment for option 1 is S The monthly payment for option 2 is $ (Do not round until the final answer. Then round to the nearest cent as needed.) Find the total amount paid for each option. The total payment for option 1 is S The total payment for option 2 is S (Use the answers from the previous step. Round to the nearest cent as needed.) Compare the two options to determine which is the better economic option. Which appears to be the better option? 0 A, Option 1 is the better option, but only if the borrower needs the lower monthly payment. B. Option 2 is the better option, but only if the borrower can afford the higher monthly payments over the entire term of the loan. ° C. Option 1 will always be the better option. D. Option 2 will always be the better option

Answer 1

(i)

a) OPTION 1- 173.2

The amount of the loan (principal) is: L-30000, the annual nominal rate r term is for n = 30 years. 0.0565, and the Therefore, effective monthly rate is rm-12-0.0047-0.47%, and the monthly payment is computed using the following formula: (1 0029)12.301 0.0047x 30000 (10.0047360 (1 +0.0047) -$173.1

b) OPTION 2- 241.2

The amount of the loan (principal) is: L 30000, the annual nominal rate r- 0.0525, and the term is for n 15 vears 0.44%, and the monthly payment is Therefore, effective monthly rate is rm-12-0.0044 computed using the following formula 12 12 25 30000 (1+525)1215 1 + 00525) 12x15 0.0044 x 30000 (10.0044)180 10.0044)1801 $241.16

(ii)

a)

Option 1 Total Payment-173.2 * 12 * 30 62352

b)

Option 2 Total Payment-241.2 * 12 * 15 434 16

c)

B. Option 2 is the better option, but only if the borrower can afford the higher monthly payments over the entire term of the loan.

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