Question

Jason Bradley’s company is planning to buy an office building at a cost of $988,000. They will pay 10% down and have a choice of financing the remaining balance at 7% for 30 years or 7.5% for 25 years. What will be the total interest for each of these choices?

a) 7% for 30 years

b) 7.5% for 25 years

c) Both choices will have the same total interest.

d) Cannot be determined from the information given.

Answer 1

The total interest for the 7% financing option for 30 years will be $605,640, while the total interest for the 7.5% financing option for 25 years will be $440,300.

Step-by-step explanation:

To calculate the total interest for each choice, we need to find the remaining balance of the office building after the down payment and then calculate the interest for each financing option.

a) For the 7% financing option for 30 years:

The remaining balance after the down payment is $988,000 - ($988,000 x 0.10) = $988,000 - $98,800 = $889,200.

Using the formula for calculating the total interest on a loan, Total Interest = (Principal x Rate x Time) - Principal:

Total Interest = ($889,200 x 0.07 x 30) - $889,200 = $1,494,840 - $889,200 = $605,640.

b) For the 7.5% financing option for 25 years:

The remaining balance after the down payment is the same, $889,200.

Using the same formula, Total Interest = ($889,200 x 0.075 x 25) - $889,200 = $1,329,500 - $889,200 = $440,300.

Therefore, the total interest for each choice is:

a) 7% for 30 years: $605,640

b) 7.5% for 25 years: $440,300

So, the correct answer is a) 7% for 30 years.