Final answer:
If unable to pay the full purchase price in cash, a buyer would commonly use a mortgage, which is a loan secured by the property being purchased, with typical terms of 15 or 30 years. A 20% down payment is often required. The advantage of a mortgage depends on the interest rate versus the rate of inflation in given years. The correct option is B.
Step-by-step explanation:
If a buyer is unable to pay for the entire purchase price of a home in cash, the most common financial tool used is a mortgage. A mortgage is a line of credit specifically designed for purchasing real estate, where the property itself acts as collateral for the loan.
Typically, the buyer is required to make a down payment, which is often around 20% of the home's purchase price. For instance, if the home costs $100,000, a 20% down payment would be $20,000, and the buyer would then borrow the remaining $80,000 from a bank or mortgage lender.
When evaluating the benefits of a mortgage, one must consider the mortgage interest rate and the rate of inflation. During years when the rate of inflation is higher than the mortgage interest rate, it is generally better for individuals to borrow money because the real value of the money they pay back is less than when they borrowed it.
Conversely, it is typically better for banks to lend money when the interest rate exceeds the rate of inflation, as they receive more value back in real terms.
Mortgages are typically structured to be paid off over a long period, such as 15 or 30 years, requiring the borrower to manage a long-term financial commitment. Making a well-informed decision regarding a mortgage is crucial, just like making decisions about other significant financial commitments, such as leasing or purchasing a vehicle, which is another example of using credit in life decisions.