You have a loan for $150,000 at 5% on a 30-year mortgage. You plan to pay off your loan in 10 years. Do you want your loan to be figured using the Rule of 78 or the Unpaid Principle Balance Rule?
You have a loan for $150,000 at 5% on a 30-year mortgage. You plan to pay off your loan in 10 years. Do you want your loan to be figured using the Rule of 78 or the Unpaid Principle Balance Rule? A. Not enough information given
B. Neither
C.Unpaid Principle Balance Rule
To determine whether you want your loan to be figured using the Rule of 78 or the Unpaid Principle Balance Rule, let's explain what each of these methods entails:
1. Rule of 78: The Rule of 78, also known as the Sum of the Digits Method, is a calculation method used to determine the prepayment penalty or interest refund on a loan. It assigns a greater proportion of the total interest to the early months or years of the loan term. As a result, if you pay off your loan earlier than scheduled, you may end up paying more interest.
2. Unpaid Principle Balance Rule: The Unpaid Principle Balance Rule, also known as the Principle Reduction Method, is a calculation method used to determine the remaining loan balance and interest due when making prepayments on a loan. It calculates interest based on the actual remaining principal balance, allowing you to save on interest payments if you pay off your loan earlier.
Now, considering your situation, you plan to pay off your loan in 10 years, well before the 30-year mortgage term. In this case, it is generally more beneficial to use the Unpaid Principle Balance Rule. This method will result in lower interest payments as interest is now calculated based on the remaining principal balance, which decreases as you make payments.
Therefore, to minimize your interest payments and more effectively pay off your loan, you should choose the Unpaid Principle Balance Rule.