Maria and john have been married for 2 years and just...

Maria and John have been married for 2 years and just learned that they are pregnant. They have been renting a small apartment but decide to purchase a house. The selling price is $400,000. They will make a 20% down payment. They are considering 2 financing options: Option 1: 3.0% interest 30-year mortgage Option 2: 2.75% interest 15-year mortgage Answer the following questions, showing all your work to reach each answer. A. Which option will result in a lower monthly payment if they take the full term of the mortgage? What will that monthly payment be? B. Which option will result in the most total interest if they take the full term of the mortgage? What will that total interest be?

Transcript

00:01 We're going to look at a question about a young couple who wants to purchase their first house, and they're going to borrow some money, and the question is whether which one of the mortgage interest rates and payment plans is going to work out better for them.

00:14 So we're going to start with the formula for interest.

00:18 Interest is equal to the principle that you're borrowing times the rate as a decimal times the time in years.

00:25 So this couple is going to purchase a house that's $400 ,000.

00:30 But they will have 20 % down that they're going to pay before they borrow some money.

00:35 So first we're going to take that $400 ,000 that they're borrowing, and we are going to multiply that by the down payment amount of 20%.

00:49 So we're going to change that into a decimal of 0 .20 to find out that they're making an $80 ,000 down payment.

00:57 Okay.

00:58 So we're going to subtract that $80 ,000.

01:01 From the $400 ,000 to see that they are going to be financing $320 ,000.

01:12 So this is our p.

01:15 That is the principle that we're going to be borrowing.

01:19 So in the very first scenario, we are going to look at if they borrowed that amount of money at a 3 % interest rate over 30 years.

01:30 So the first thing we're going to do is we're going to calculate the i for interest.

01:35 Okay.

01:35 So we're going to take our principal $320 ,000.

01:41 We're going to multiply that by the rate as a decimal.

01:44 So this is going to be 0 .03, and we're going to multiply that by 30 years...

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