Question

If $120,000 is borrowed for a home mortgage, to be repaid at 9% interest over 30 years with annual payments of $11,680.36, how much interest (as opposed to return of capital) is paid in the last year of the loan?

A. $120,000 B. $162,000 C. $181,458 D. $227,598

Answer 1

Interest is paid in the last year of the loan

Loan Balance at the beginning of the 30^th year = Annual Payments / (1 + Interest Rate)

= $11,690.36 / (1 + 0.09)

= $11,690.36 / 1.09

= $10,715.93

Interest is paid in the last year of the loan = Loan Balance at the beginning of the 30th year x Interest Rate of the Loan

= $10,715.93 x 9%

= $964.43

“Therefore, The Interest is paid in the last year of the loan would be $964.43”

Total Interest Paid over the life of the Loan

Total Interest Paid over the life of the Loan = (Annual Payments x Number of years) – Loan Amount

= ($11,680.36 x 30 Years) - $120,000

= $350,410.80 - $120,000

= $230,410.80

“Hence, the Total Interest Paid over the life of the Loan would be $230,410.80”