Question

Suppose home owners owe $3 trillion in mortgage loans.

Instructions: Enter your responses as a positive whole number (do not include a negative (-) sign).

(a) If the mortgage interest rate is 9 percent, approximately how much are home owners paying in annual mortgage interest?

$  billion

(b) If the interest rate drops to 8 percent, by how much will annual interest payments decline?

Interest decline of $  billion

Answer 1

(a)

Total mortgage loans = $3 trillion

Mortgage interest rate = 9%

Calculate the amount that home owners pay in annual mortgage interest -

Amount = Total mortgage loans * Mortgage interest rate

Amount = $3 trillion * 0.09

Amount = $270 billion

Thus,

Home owners are paying $270 billion in annual mortgage interest.

(b)

Now, interest rate drops to 8 percent.

Total mortgage loans = $3 trillion

Mortgage interest rate = 8%

Calculate the amount that home owners pay in annual mortgage interest -

Amount = Total mortgage loans * Mortgage interest rate

Amount = $3 trillion * 0.08

Amount = $240 billion

At 8 percent interest rate, home owners pay $240 billion in annual mortgage interest.

Calculate the decline in annual interest payments -

Decline = $270 billion - $240 billion = $30 billion

Thus,

If the interest rate drops to 8 percent, annual interest payments will decline by $30 billion.