Question

Please help!-----------------

The Johnsons are buying a house that costs $210,000 and can afford a 20% down payment. If the Johnsons want the lowest monthly payment, which loan option would you recommend?

a.

30 year FHA, 3.5% down at a fixed rate of 6.25%

b.

30 year fixed, 20% down at a fixed rate of 6%

c.

30 year fixed, 10% down at a fixed rate of 6%

d.

15 year fixed, 20% down at a fixed rate 5.5%


Anyone know how to do this and can explain?

Answer 1

9514 1404 393

Answer:

b. 30 year fixed, 20% down at a fixed rate of 6%

Explanation:

Loan payments increase when ...

loan value is higher

interest rate is higher

payback period is shorter

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For the lowest payment, you need to choose the longer payback period (30 years vs. 15 years). To make the loan value lower, the down payment must be higher (20% vs. 10% or 3.5%). A lower interest rate (6% vs 6.25%) will make the payment lower, too.

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A financial calculator says ...

15 year loan on 168,000 at 5.5% -- payment is $1372.70

30 year loan on 168,000 at 6% -- payment is $1007.24

The interest rate must be about 1.02% for the 15-year loan to have a payment as low as the 30-year loan.

The lowest payment will be on the loan of choice B.