Question 16

The borrower would prefer a mortgage rate of 10% for 25 years.

Choosing a mortgage with a longer term, such as 25 years, generally results in lower monthly payments compared to a shorter term. In this case, the borrower would benefit from the lower interest rate of 10% over 25 years, making the payments more manageable.

A) 10% for 20 years

While this option has a favorable interest rate of 10%, the shorter 20-year term means higher monthly payments compared to the 25-year option. Thus, it is not the best choice for a borrower looking to minimize monthly expenses.

B) 10% for 25 years

This option provides the lowest monthly payments since it combines a relatively low interest rate of 10% with the longest term of 25 years. The longer repayment period spreads out the loan balance, resulting in smaller monthly payments, making it the ideal choice for the borrower.

C) 11% for 20 years

Although this option has a shorter term, the higher interest rate of 11% leads to higher monthly payments compared to the 10% options. Consequently, it is not suitable for the borrower seeking the lowest monthly payment.

D) 11% for 25 years

This option does offer a longer term, which could lower payments, but the higher interest rate of 11% outweighs the benefits of the extended repayment period. Therefore, it results in higher monthly payments than the 10% for 25 years option, making it less desirable for the borrower.

Conclusion

The option of 10% for 25 years stands out as the most beneficial for the borrower seeking the lowest monthly payments, as it balances a favorable interest rate with the longest repayment term. All other options either have higher interest rates or shorter terms, which lead to increased monthly payments, thus failing to meet the borrower's primary goal of minimizing costs.