Question

Mr. Franks is buying a home for $300,000 and is putting down 25% cash on the purchase. He is financing the rest with a 30 year fixed rate mortgage at 4.25%, but is considering a bi-weekly payment option. How much interest would the bi-weekly option allow him to save over the life of the loan, and how long would it take him to pay off the loan?

I know the answer is $28,346 and 25.72 years but im not sure how to get that answer.

Answer 1

USING FINANCIAL CALCULATOR
Step 1: Monthly payment
PV=-300000*(1-25%)
I/Y=4.25%/12
N=12*30
FV=0
CPT PMT=1106.86475492884

Step 2: Time taken
PMT=-1106.86475492884
PV=300000*(1-25%)
FV=0
I/Y=4.25%/26
CPT N=668.72

Step 3: Interest Saved
=668.72*1106.86475492884/2-12*30*1106.86475492884
=28346

ALTERNATIVELY USING EXCEL
Time taken:
=NPER(4.25%/26,PMT(4.25%/12,12*30,-300000*(1-25%))/2,-300000*(1-25%))
=668.72 biweekly payments
or
=668.72/26 years=25.72 years

Interest Saved=PMT(4.25%/12,12*30,-300000*(1-25%))*12*30-PMT(4.25%/12,12*30,-300000*(1-25%))/2*668.72
=28346