Final answer:
The correct monthly payment for a fixed-rate mortgage with a principal of $170,000, a term of 30 years, and an interest rate of 4.25% is $877. This payment accounts only for principal and interest, excluding taxes and insurance. Understanding mortgage types and total loan costs is crucial for financial planning when buying a house.
Step-by-step explanation:
The student is asking about the monthly payment Demarco and Tanya should anticipate for their fixed-rate mortgage. Given a principal of $170,000, a term of 30 years, and an interest rate of 4.25%, the correct monthly payment for principal and interest only would be neither $208, $669, nor $1,200, but rather $877 based on standard mortgage calculation formulas. This monthly payment does not include additional costs such as property taxes, homeowners insurance, or private mortgage insurance.
When buying a house, it's crucial to understand the total cost over the life of the mortgage. For example, the total paid for a $170,000 loan at 4.25% interest over 30 years would be significantly more than the initial loan amount. Similarly, a $1,000,000 loan at 6% interest would result in 360 payments of $5,995.51, totaling over $2.1 million paid over 30 years. Paying a higher monthly payment can reduce the term of the loan and the total interest paid, as shown in the example where increasing the monthly payment to $1,948.54 on a $300,000 loan could save over $73,000 in interest and reduce the loan term by over 5 years.
Understanding the difference between fixed-rate and adjustable-rate mortgages (ARMs) is also important. A fixed-rate mortgage has a constant interest rate throughout the loan term, while an ARM's rate can change with market conditions, potentially leading to higher payments if interest rates increase.