Question

Decreasing the number of years of a loan decreases the amount of interest repaid over the term of the loan. Suppose a dental hygienist has the option of a 30-year loan or a 25-year loan of $345,000 at an annual interest rate of 3.75%.
(a)
a) Calculate the monthly payment (in dollars) for each loan. (Round your answers to the nearest cent.)
30-year loan
25-year loan

b) Calculate the savings in interest (in dollars) by using the 25-year loan. (Round your answer to the nearest cent.)

Answer 1

Answer:

  a) 30 yr: $1597.75; 25 yr: $1773.75

  b) $43065.00

Step-by-step explanation:

The monthly payment for each loan can be found using the amortization formula, or a spreadsheet or calculator. The shorter 25-year loan has fewer and larger payments, but the net result is less interest paid.

a)

The attached calculator shows the monthly payments to be ...

  30 year loan: $1597.75 monthly

  25 year loan: $1773.75 monthly

b)

The number of payments is the product of 12 payments per year and the number of years. The total repaid is the monthly payment times the number of payments.

The difference in amounts repaid is the difference in interest charged.

  360×1597.75 -300×1773.75 = $43065 . . . . savings using 25-year loan

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Additional comment

The monthly payment on a loan of principal P at annual rate r for t years is ...

  A = P(r/12)/(1 -(1 +r/12)^(-12t))

Some calculators and all spreadsheets have built-in functions for calculating this amount.