Final answer:
To determine if it's better to be a borrower or a lender in a given year for mortgages, compare the mortgage interest rate to the rate of inflation. Factors such as the perceived riskiness of the loan and the comparison of past and current interest rates influence financial institutions' decisions in the secondary loan market. Lower down payments often require additional mortgage insurance, increasing the overall cost of a mortgage. The correct answer is option 2) Buyer may choose to pay cash at closing.
Step-by-step explanation:
When assessing whether it was better to be a person borrowing money or a bank during certain years for mortgage loans, one must look at the mortgage interest rate in comparison to the rate of inflation for those years. If the interest rate was lower than the inflation rate, it meant that the real cost of the loan was decreasing over time, making it advantageous for borrowers. Conversely, if the interest rate was higher than the inflation rate, banks stood to gain more as the real value of the money they lent out would be worth more over the loan's term. Additionally, factors such as perceived riskiness of the loan and current interest rates in the economy affect the price financial institutions are willing to pay for loans in the secondary market. Banks consider the characteristics of a borrower like income level and local economic performance, and the interest rates comparison with current rates to decide the worthiness of acquiring a loan.
The 20% rule is a general guideline for down payments on homes, but there are options available for potential homebuyers to pay much lower down payments, such as 0-3.5%. However, this comes with the obligation of getting mortgage insurance, which ultimately increases the cost of the mortgage over time.