You are planning to buy a new house and need to borrow $300,000 from your friendly banker. You are considering either a 30 year or 15 year mortgage. Both mortgages charges a 5% interest rate per year.
a. What is the monthly payment required by both mortgages?
b. How much of each month’s payment goes to paying interest and how much reducing the principle balance? To answer this question provide two graphs (one for the 30 year mortgage and one for the 15 year mortgage) with time on the x-axis and money on the y-axis. Each graph should have three lines the payment amount, interest component and principal component. Make sure the graph, axes and lines are clearly labeled.
c. What is the total amount paid for the 30 year and 15 year mortgages?
d. Which mortgage would you prefer? Explain.