Question

When obtaining a mortgage you should

A) apply for the maximum amount you can afford, since the house will be an appreciating asset.
B) let a realtor or some other expert choose the type and length of mortgage you will need.
C) maintain some funds for liquidity purposes to cover unanticipated bills.
D) be very conservative and apply only for a mortgage amount you can pay off within 10 years.

Answer 1

You should maintain some liquidity when obtaining a mortgage to cover unforeseen expenses. The general rule is to make a 20% down payment to avoid extra costs, and carefully consider the mortgage terms to ensure affordability without compromising other financial priorities. The correct option is c.

Step-by-step explanation:

When obtaining a mortgage, you should maintain some funds for liquidity purposes to cover unanticipated bills (Option C). It's important to be realistic about what you can afford when borrowing. A general rule of thumb is to put down about 20% of your home's purchase price.

By doing so, you avoid extra costs like mortgage insurance. When considering a mortgage, one must also consider the terms, often 15 or 30 years, and the monthly payments you can afford to make without overstressing your finances.

For instance, Joanna knows she can afford to pay $12,000 a year for a home loan with an interest rate of 4.2% annually for 30 years. She would want to calculate the maximum loan amount she can afford while still being able to handle other financial obligations and unexpected expenses. The correct option is c.