Which of the following statements is true?
a. A 30 year fixed mortgage will always result in the lowest payment.
b. You must have at least a 20% down payment to get a competitive interest rate.
c. The lower your interest rate is, the lower your monthly payments are.
d. The faster you pay off your mortgage, the lower your monthly payments are.
Answer (1)
Analyze each statement to determine its validity.
Statement a is not always true due to other factors like interest rates.
Statement b is not a strict requirement as competitive rates can be found with lower down payments.
Statement c is generally true: lower interest rates lead to lower monthly payments.
Statement d is false: faster payoff implies higher monthly payments.
The correct answer is C.
Explanation
Analyzing the Statements Let's analyze each of the provided statements to determine which one is true.
Evaluating Statement A Statement a: A 30-year fixed mortgage will always result in the lowest payment. This is not always true because factors like interest rates can affect the payment amount. Shorter-term mortgages with very low interest rates could have lower payments.
Evaluating Statement B Statement b: You must have at least a 20% down payment to get a competitive interest rate. While a 20% down payment often helps in securing a better interest rate, it is not a strict requirement. Some lenders offer competitive rates with lower down payments, although this might involve paying for private mortgage insurance (PMI).
Evaluating Statement C Statement c: The lower your interest rate is, the lower your monthly payments are. This statement is generally true, assuming the loan amount and term are constant. A lower interest rate directly translates to a smaller portion of each payment going towards interest, thus reducing the overall monthly payment.
Evaluating Statement D Statement d: The faster you pay off your mortgage, the lower your monthly payments are. This statement is false. Paying off a mortgage faster means you're making larger monthly payments to reduce the principal quicker.
Conclusion Based on the analysis, statement c is the most accurate.
Examples
Understanding the factors that influence mortgage payments is crucial in personal finance. For instance, if you're deciding between two job offers, one in a high-cost-of-living area and another in a low-cost area, knowing how interest rates affect your mortgage payments can help you make an informed decision. A lower interest rate can significantly reduce your monthly expenses, allowing you to allocate more funds to other investments or savings. This knowledge is also useful when refinancing a mortgage, as even a small reduction in the interest rate can lead to substantial savings over the life of the loan. Let's say you have a mortgage of $200,000. At a 4% interest rate, your monthly payment would be approximately $955. At a 3% interest rate, your monthly payment would be approximately $843. That's a difference of $112 per month, or 1344 p erye a r ! M = P ( 1 + i ) n − 1 i ( 1 + i ) n , w h ere M i s t h e m o n t h l y p a y m e n t , P i s t h e p r in c i p a ll o anam o u n t , i i s t h e m o n t h l y in t eres t r a t e , an d n$ is the number of payments.
