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?

Question

Quizplus · Accepted Answer

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.

You Are Considering Two Payment Options on a $500,000 20-Year