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A lender offers the Greys two alternative loan packages for their $60,000 home equity application. One option is an interest-only loan for 5 years @ 6.5% interest with no points, and the second, a 6.25% interest-only loan for 5 years with 1 point to be paid at closing. Which loan will cost the Greys less total interest, and by how much?

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jepessoa

Answer:

The Greys will pay less interest if they take the second option: $19,500 - $19,350 = $150

Explanation:

First option will cost the Greys = 6.5% x $60,000 x 5 years = $19,500 in interests

Second option will cost the Greys = (6,25% x $60,000 x 5 years) + ($60,000 x 1%) = $18,750 + $600 = $19,350

The Greys will pay less interest if they take the second option: $19,500 - $19,350 = $150

*One point equals 1% of the total principal

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