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2 July, 10:10

Dusty has the choice of taking out a 25-year loan for $165,000 at 9.1% interest, compounded monthly, or the same loan at 20 years for a higher monthly payment. how much more is the monthly payment for the 20 - year loan than the monthly payment for the 25-year loan?

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  1. 2 July, 10:26
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    It is $99.04 more per month.

    The payment is calculated by P = A/D, where A is the amount of the loan and D is the discount factor.

    D = (((1+r) ^n) - 1) / (r (1+r) ^n), where r is the annual interest rate as a decimal divided by 12, and n is the number of months he will be paying.

    Since the rate is 9.1%, r = (9.1/100) / 12 = 0.091/12 = 0.0076

    For the 25 year loan, n = 25*12 = 300:

    D = (((1+0.0076) ^300) - 1) / (0.0076 (1+0.0076) ^300) = 118.004

    P = A/D = 165000/118.004 = 1398.26 per month

    For the 20 year loan, n = 20*12 = 240:

    D = (((1+0.0076) ^240) - 1) / (0.0076 (1+0.0076) ^240) = 110.198

    P = A/D = 165000/110.198 = 1497.30 per month

    The difference between payments is

    1497.30 - 1398.26 = 99.04
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