Consider the two payment options shown here for a $75,000 mortgage loan. Option 1: Monthly payment of $490.83 over a period of 20 years, which corresponds to a fixed annual interest rate of 4.9%. Option 2: Monthly payment of $783.45 over a period of 10 years, which corresponds to a fixed annual interest rate of 4.67%. Determine which option offers a lower cost of credit. Find the lower credit cost.
To determine which option offers a lower cost of credit, we need to calculate the total amount paid for each option.
Option 1:
- Monthly payment: $490.83
- Number of payments: 20 years x 12 months/year = 240 payments
- Total amount paid: $490.83/month * 240 payments = $117,799.20
Option 2:
- Monthly payment: $783.45
- Number of payments: 10 years x 12 months/year = 120 payments
- Total amount paid: $783.45/month * 120 payments = $94,014.00
Therefore, option 2 offers a lower cost of credit. The lower credit cost is $94,014.00.