Question

The Fongs need to borrow $200,000 to purchase a home. A local bank is offering a 20-year mortgage at 6.75% interest, while an online lender is offering a 30-year mortgage at 5.25% interest. Assuming simple interest, which loan will result in the lower interest?

Answer 1

To compare the two mortgage options, we need to calculate the total interest paid over the life of each loan.

For the 20-year mortgage at 6.75%, the total interest can be calculated as:

Total interest = Principal x Rate x Time

Total interest = $200,000 x 0.0675 x 20

Total interest = $270,000

So the total amount paid back over the 20-year mortgage is $470,000 ($200,000 principal + $270,000 interest).

For the 30-year mortgage at 5.25%, the total interest can be calculated as:

Total interest = Principal x Rate x Time

Total interest = $200,000 x 0.0525 x 30

Total interest = $315,000

So the total amount paid back over the 30-year mortgage is $515,000 ($200,000 principal + $315,000 interest).

Therefore, even though the interest rate on the 20-year mortgage is higher, it results in lower total interest paid because the loan term is shorter. So the Fongs should choose the 20-year mortgage from the local bank to pay less interest overall.