Answer:
Home Equity Loan is truly cheaper
Explanation:
Data provided in the question:
APR of the loan taken = 6.9% = 0.069
Interest rate on Loan for boat per annum
= [tex](1 + \frac{r}{n})^{t}-1[/tex]
n = number of periods = 12 [when compounded monthly]
t = time = 1 year = 12 months
thus,
Annual Interest rate on Loan for boat = [tex](1 + \frac{0.069}{12})^{12}-1[/tex]
= 7.12%
APR on home equity loan = 7.9% = 0.079
Annual Interest rate on Home Equity Loan = [tex](1 + \frac{0.079}{12})^{12}-1[/tex]
= 8.51%
Tax saving on interest paid @ 25% = 0.25 × Annual Interest rate
= 0.25 × 8.51
= 2.1275% ≈ 2.13%
Therefore,
Total Interest cost on home equity loan
= Annual Interest rate - Tax saving on interest paid
= 8.51% - 2.13%
= 6.38%
Hence,
Home Equity Loan is truly cheaper
