Question: Married clients have just been approved for a 30-year, $ 150,000 mortgage, with an APR of 7%. However, they know that they do not want to make only the regular payment and that they do not want to take the entire 30 years to pay off the balance. So they have suggested two options they would like analyzed. Option 1 requires a fixed monthly payment of $ 1,200. Option 2 requires that they start with the regular payment but then increase that amount by an effective monthly rate of 0.35%.
They want to know the answers to the following questions.
a. Which payment method will result in a faster payoff?
b. What is the difference in total interest payments between the two alternative payment methods? Hint: The total of payment for Option 2 involves using the formula for the partial sum of a geometric series.
c. Which repayment method results in higher home equity (the lower loan balance) after 14 years?
Please show calculations.