Question

A first-time homebuyer is comparing mortgage rates. Option A offers the homebuyer 5.25% annual simple interest. Option B offers the homebuyer the same interest rate but compounded semiannually. If the repayment period is the same length for both loans, which option will result in the least amount of interest added to the loan? Option A will have the least amount of interest because simple interest generates earnings from both principal and interest. Option A will have the least amount of interest because simple interest generates earnings from principal only. Option B will have the least amount of interest because compound interest generates earnings from principal only. Option B will have the least amount of interest because compound interest generates earnings from both principal and interest.

Answer 1

If the repayment period is the same length for both loans, the interest option that will result in the least amount of interest added to the loan is B. Option A will have the least amount of interest because simple interest generates earnings from principal only.

What is the simple interest?

The simple interest is the interest system that does not compute interest on accumulated interest.

Unlike simple interest, compound interest charges interest on accumulated interest.

Thus, the simple interest system applies the interest rate on the principal only for each period to determine the amount of interest.

Explanation:

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