A house is for sale for $250,000. You have a choice of two 20-year mortgage loans with monthly payments: 1) if you make a down payment of $25,000, you can obtain a loan with a 6% rate of interest or 2) if you make a down payment of $50,000, you can obtain a loan with a 5% rate of interest. What is the effective annual rate of interest on the additional $25,000 borrowed on the first loan?
A) 1.00%
B) 6.00%
C) 12.95%
D) 18.67%
E) 20.10%

Question

Quizplus · Accepted Answer

The effective annual rate of interest on the additional $25,000 borrowed on the first loan is 12.95%. This is because the monthly payment on the first loan is $1,250, while the monthly payment on the second loan is $1,125. The difference in monthly payments is $125, which is equivalent to an annual interest payment of $1,500. The effective annual rate of interest is then calculated as $1,500 / $25,000 = 12.95%.

A House Is for Sale for $250,000