What are the monthly payments on each of the following mortgage loans? Which loan is the best option for a homeowner who can afford payments of $875 per month? What is the total amount that will be paid for each loan? Assume each mortgage is $100,000.

• Loan A: A thirty-year loan with a fixed interest rate of 8.5 percent
• Loan B: A fifteen-year loan with a fixed interest rate of 7.75 percent
• Loan C: A twenty-year loan with a fixed interest rate of 8.125 percent

Loan A. To determine the monthly payment for a thirty-year loan with an 8.5 percent fixed interest rate, clear your calculator's memory, and then set your calculator to twelve monthly payments and “end mode.” Input the following to solve this equation:

• PV = –$100,000
• N = 360 (Calculate the number of monthly periods by multiplying the length of the loan by the number of months in a year: 30*12 = 360)
• I = 8.5
• PMT = ?

Your monthly payment for this loan would be $768.91, and the total amount of all payments would be $768.91 * 360, or $276,807.60.

Loan B. For a fifteen-year loan at 7.75 percent interest, follow the same steps explained above. This time, input the information listed below:

• PV = –$100,000
• N = 15 * 12 = 180
• >  I = 7.75
• PMT = ?

The monthly payment for this loan would be $941.28, and the total amount of all payments would be $941.28 * 180, or $169,430.40.

Loan C. For a twenty-year loan at 8.125 percent interest, the calculations are still the same. Input the following in your financial calculator:

• PV = –$100,000
• N = 20 * 12 = 240
• I = 8.125
• PMT = ?

The monthly payment for this loan would be $844.24, and the total amount of all payments would be $844.24 * 240, or $202,617.60.

Considering the mortgage payment the homeowner can afford, the best financial option is Loan C—the twenty-year fixed-rate mortgage at 8.125 percent interest. This loan would allow the homeowner to pay off the home in ten fewer years than if he or she had the thirty-year loan. In addition, they will pay $74,190 less.