Your current $155,000 mortgage calls for monthly payments over 25 years at an annual rate interest rate of 6%. If you pay an additional $50 each month beginning with the first payment, how much interest expense do you save by pre-paying?

Question

Quizplus · Accepted Answer

First, we need to calculate the monthly payment without the additional $50 pre-payment. We can use the PMT function in Excel or a financial calculator to find that the monthly payment is $990.46.

Next, we need to calculate the new monthly payment with the $50 pre-payment. The new monthly payment would be $1,040.46 ($990.46 + $50).

Using the PMT function or financial calculator again, we can calculate that the new loan term is shortened to 22 years and 5 months.

To calculate the interest saved, we need to find the total interest paid under the original mortgage and subtract the total interest paid with the pre-payment. The total interest paid under the original mortgage is $149,981.28.

The total interest paid with the pre-payment is $132,829.06. Therefore, the interest saved by pre-paying is $17,152.22 ($149,981.28 - $132,829.06).

Therefore, the correct answer is C.

Your Current $155,000 Mortgage Calls for Monthly Payments Over 25