Five years ago, you took out a 30-year mortgage with an APR of 6.5% for $200 000. If you were to refinance the mortgage today for 20 years at an APR of 4.25%, how much would you save in total interest expense?

Question

Quizplus · Accepted Answer

To find the total interest expense for the original mortgage, we can use the formula:
Total interest = (P x r x n) - P
where P = principal (loan amount), r = annual interest rate (as a decimal), and n = number of years.

For the original mortgage:
P = $200,000
r = 6.5% = 0.065
n = 30

Total interest = ($200,000 x 0.065 x 30) - $200,000
Total interest = $247,220

To find the total interest expense for the refinanced mortgage, we can use the same formula:
Total interest = (P x r x n) - P

For the refinanced mortgage:
P = $200,000
r = 4.25% = 0.0425
n = 20

Total interest = ($200,000 x 0.0425 x 20) - $200,000
Total interest = $146,222

The difference in total interest between the two mortgages is:
$247,220 - $146,222 = $100,998

Therefore, the answer is choice C, you would save $100,998 in total interest expense by refinancing the mortgage.

Five Years Ago, You Took Out a 30-Year Mortgage with an APR