Question

Assume that Jocelyn is comparing two fixed-rate loan options, a 15 year and a 30 year mortgage. Both options have the same interest rate and amount borrowed. The 30 year, when compared to the 15 year loan will have a 1)_____________ monthly payment and a 2)___________ total cost when repayment is completed. Higher, Lower Lower, Higher Lower, Lower Higher, Higher

Answer 1

Assume that Jocelyn is comparing two fixed-rate loan options, a 15 year and a 30 year mortgage. Both options have the same interest rate and amount borrowed. The 30 year, when compared to the 15 year loan will have a lower monthly payment and a higher total cost when repayment is completed.

The longer the spread of an annuity payment the lower the monthly payment and the higher the total cost of the loan.

Answer 2

The answer is: Lower;higher

Longer loan duration would provide more risk for the lender, Because of this, the annual interest rate for long term loans tend to be higher compared to short term loan.

When comparing  30 year loan and 15 year loan, the payment that Jocelyn will make for 30 year loan would be cheaper. But, since long term loan has higher annual interest rate, the accumulated cost would be higher when it reach maturity date.