Question

Review the following monthly principal and interest factor chart to answer the question:

FICO Score APR 30-Year Term 20-Year Term 15-Year Term
770-789 5.5 $5.68
$6.88
$8.17
750-769 6.0 $6.00
$7.16
$8.44
730-749 6.5 $6.32
$7.46
$8.71
710-729 7.0
$6.65
$7.75
$8.99
690-709 7.5 $6.99
$8.06
$9.27
Calculate the monthly payment for a 15-year term mortgage after a 20% down payment on a $284,500.00 purchase price,
for a household with a 700 credit score. (4 points)
$2,531.45
$2,109.85
O $1,825.64
$2,384.81

Answer 1

(b) $2109.85

Explanation:

You want the monthly loan payment on a 15-year loan for a home with a $284,500 purchase price if 20% is put down, and the borrower's credit score is 700.

Payment multiplier

The table tells you that a 15-year loan for a borrower with a 700 credit score will have a monthly payment of $9.27 per thousand dollars of loan value.

Loan value

The loan will be for the 80% of the home value that is not already paid by the down payment. In thousands of dollars, that is 284.5 × 0.80.

Monthly payment

The monthly payment is the product of the loan value (in thousands) and the payment multiplier:

$284.5 × 0.80 × 9.27 = $2109.85

The monthly payment is $2109.85.

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Additional comment

The higher loan cost for a borrower with a low credit score is effectively saying the lender is presuming about 12% of loans to such borrowers will be in default.

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