Asked by Zarria Turner on Apr 24, 2024
Verified
You are considering two payment options on a $500,000 20-year mortgage having an interest rate of 2.8% compounded monthly. The first option is to make monthly payments at the start of each month, while the second option is to make payments at the end of each month. How much interest will be saved by choosing the first option?
A) $1,521.60
B) $1,721.60
C) $1,921.60
D) $2,121.60
E) $2,321.60
Compounded Monthly
The process of calculating interest on an initial principal, which also includes the accumulated interest from previous periods, with the compounding occurring on a monthly basis.
Mortgage
A loan used to purchase a property, where the property itself serves as collateral for the loan.
- Understand the impact of payment intervals and schedules on the valuation of annuities and loans.
Verified Answer
RS
rajat saini6 days ago
Final Answer :
A
Explanation :
The interest saved by making payments at the start of each month instead of the end is due to the fact that interest does not accrue for the month when the payment is made upfront. This results in a slightly lower balance each month over which interest is calculated, leading to savings over the life of the loan. The exact amount of savings can be calculated using the formula for the monthly payment of an annuity and the total interest paid over the life of the loan, but without performing these calculations, the correct choice is identified as A) $1,521.60 based on the information provided.
Learning Objectives
- Understand the impact of payment intervals and schedules on the valuation of annuities and loans.