Your father has a mortgage loan on the family home that was made several years ago when interest rates were lower. The loan has a current balance of $40,000 & will be paid off in 20 years by paying $330 per month. He discussed paying off the loan ahead of schedule w/ an officer of the bank holding the mortgage. The bank is willing to accept $36000 right now to pay off the loan completely. If your father is currently earning 9% on his investments, should he pay off the loan?
We need to compare the interest rate on the mortgage payments with the opportunity cost of 9%. The mortgage is to be repaid in 20 years or 240 months at a monthly payment of $330. The present ...
The solution explains how to evaluate a loan repayment decision.