Question

House is for sale for $350,000. You have a choice of two 30-year mortgage loans with monthly payments: (1) if you make a down payment of $20,000, you can obtain a loan with an 8.50% rate of interest or (2) if you make a down payment of $70,000, you can obtain a loan with a 6.50% rate of interest. What is the effective annual rate of interest on the additional $30,000 borrowed across the two options? Assume the loan is held to maturity.

Answer 1

To find the effective annual rate of interest on the additional $30,000 borrowed across the two options, calculate the total interest paid and compare the options.

Step-by-step explanation:

To find the effective annual rate of interest on the additional $30,000 borrowed across the two options, we need to calculate the total interest paid for each option and compare them. Here's how:

Option 1:

1. Loan amount = $350,000 - $20,000 = $330,000
2. Interest rate = 8.50%
3. Total interest paid = Monthly payment * Number of months - Loan amount

Option 2:

1. Loan amount = $350,000 - $70,000 = $280,000
2. Interest rate = 6.50%
3. Total interest paid = Monthly payment * Number of months - Loan amount

After calculating the total interest paid for each option, we can find the effective annual rate of interest on the additional $30,000 borrowed by dividing the difference in total interest paid by the loan amount and multiplying by 100. This will give us the percentage interest paid on the additional $30,000 over the 30-year period.